Does Saksoft (NSE:SAKSOFT) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Saksoft Limited (NSE:SAKSOFT) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Saksoft

What Is Saksoft's Net Debt?

The image below, which you can click on for greater detail, shows that Saksoft had debt of ₹206.8m at the end of March 2022, a reduction from ₹350.6m over a year. However, it does have ₹1.05b in cash offsetting this, leading to net cash of ₹846.6m.

How Strong Is Saksoft's Balance Sheet?

We can see from the most recent balance sheet that Saksoft had liabilities of ₹1.16b falling due within a year, and liabilities of ₹269.3m due beyond that. Offsetting these obligations, it had cash of ₹1.05b as well as receivables valued at ₹1.25b due within 12 months. So it actually has ₹876.3m more liquid assets than total liabilities.

This surplus suggests that Saksoft has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Saksoft boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Saksoft has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Saksoft will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Saksoft may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Saksoft recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Saksoft has ₹846.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹505m, being 76% of its EBIT. So we don't think Saksoft's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Saksoft's earnings per share history for free.

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.