Saksoft (NSE:SAKSOFT) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Saksoft Limited (NSE:SAKSOFT) does carry debt. 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 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Saksoft

What Is Saksoft's Debt?

As you can see below, Saksoft had ₹284.9m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₹1.08b in cash offsetting this, leading to net cash of ₹798.5m.

A Look At Saksoft's Liabilities

Zooming in on the latest balance sheet data, we can see that Saksoft had liabilities of ₹754.5m due within 12 months and liabilities of ₹304.8m due beyond that. On the other hand, it had cash of ₹1.08b and ₹677.3m worth of receivables due within a year. So it actually has ₹701.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Saksoft could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Saksoft boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Saksoft has increased its EBIT by 7.2% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Saksoft'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, a company can only pay off debt with cold hard cash, not accounting profits. 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 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Saksoft has net cash of ₹798.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in ₹627m. So is Saksoft's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Saksoft , and understanding them should be part of your investment process.

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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