Ramco Systems (NSE:RAMCOSYS) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Ramco Systems Limited (NSE:RAMCOSYS) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ramco Systems

What Is Ramco Systems's Debt?

The image below, which you can click on for greater detail, shows that Ramco Systems had debt of ₹195.1m at the end of September 2023, a reduction from ₹830.0m over a year. However, its balance sheet shows it holds ₹282.1m in cash, so it actually has ₹87.0m net cash.

How Healthy Is Ramco Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ramco Systems had liabilities of ₹2.87b due within 12 months and liabilities of ₹758.5m due beyond that. On the other hand, it had cash of ₹282.1m and ₹1.17b worth of receivables due within a year. So it has liabilities totalling ₹2.18b more than its cash and near-term receivables, combined.

Given Ramco Systems has a market capitalization of ₹12.0b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Ramco Systems also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ramco Systems can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Ramco Systems reported revenue of ₹5.2b, which is a gain of 6.5%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Ramco Systems?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Ramco Systems had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₹380m of cash and made a loss of ₹2.9b. With only ₹87.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Ramco Systems (of which 1 is a bit unpleasant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.