Saksoft (NSE:SAKSOFT) Could Easily Take On More 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. As with many other companies Saksoft Limited (NSE:SAKSOFT) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Saksoft

What Is Saksoft's Net Debt?

As you can see below, Saksoft had ₹169.9m of debt at September 2021, down from ₹352.6m a year prior. But on the other hand it also has ₹1.07b in cash, leading to a ₹904.1m net cash position.

A Look At Saksoft's Liabilities

We can see from the most recent balance sheet that Saksoft had liabilities of ₹845.0m falling due within a year, and liabilities of ₹188.2m due beyond that. Offsetting this, it had ₹1.07b in cash and ₹800.2m in receivables that were due within 12 months. So it can boast ₹840.9m 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!

On top of that, Saksoft grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. While Saksoft 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. During the last three years, Saksoft produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Saksoft has net cash of ₹904.1m, as well as more liquid assets than liabilities. And we liked the look of last year's 36% year-on-year EBIT growth. So is Saksoft's debt a risk? It doesn't seem so to us. 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.

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.