R Systems International (NSE:RSYSTEMS) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that R Systems International Limited (NSE:RSYSTEMS) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for R Systems International

How Much Debt Does R Systems International Carry?

As you can see below, at the end of March 2021, R Systems International had ₹120.1m of debt, up from ₹6.91m a year ago. Click the image for more detail. But on the other hand it also has ₹3.79b in cash, leading to a ₹3.67b net cash position.

How Healthy Is R Systems International's Balance Sheet?

The latest balance sheet data shows that R Systems International had liabilities of ₹1.47b due within a year, and liabilities of ₹768.2m falling due after that. Offsetting these obligations, it had cash of ₹3.79b as well as receivables valued at ₹1.29b due within 12 months. So it can boast ₹2.85b more liquid assets than total liabilities.

This short term liquidity is a sign that R Systems International could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that R Systems International has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that R Systems International has boosted its EBIT by 89%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is R Systems International's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While R Systems International has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, R Systems International recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case R Systems International has ₹3.67b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹1.1b, being 87% of its EBIT. So we don't think R Systems International's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for R Systems International that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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