Ramco Systems (NSE:RAMCOSYS) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Ramco Systems Limited (NSE:RAMCOSYS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ramco Systems

How Much Debt Does Ramco Systems Carry?

You can click the graphic below for the historical numbers, but it shows that Ramco Systems had ₹627.0m of debt in March 2024, down from ₹1.06b, one year before. However, it does have ₹176.9m in cash offsetting this, leading to net debt of about ₹450.1m.

How Strong Is Ramco Systems' Balance Sheet?

According to the last reported balance sheet, Ramco Systems had liabilities of ₹2.60b due within 12 months, and liabilities of ₹927.2m due beyond 12 months. Offsetting this, it had ₹176.9m in cash and ₹1.36b in receivables that were due within 12 months. So its liabilities total ₹1.99b more than the combination of its cash and short-term receivables.

Given Ramco Systems has a market capitalization of ₹15.4b, 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ramco Systems can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Ramco Systems reported revenue of ₹5.2b, which is a gain of 2.2%, 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.

Caveat Emptor

Over the last twelve months Ramco Systems produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₹2.0b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹2.1b. So we do think this stock is quite risky. 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. For example - Ramco Systems has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.