Sonata Software (NSE:SONATSOFTW) Seems To Use Debt Quite Sensibly

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.' 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 can see that Sonata Software Limited (NSE:SONATSOFTW) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Sonata Software Carry?

The image below, which you can click on for greater detail, shows that Sonata Software had debt of ₹4.42b at the end of March 2025, a reduction from ₹6.74b over a year. However, it does have ₹6.95b in cash offsetting this, leading to net cash of ₹2.53b.

How Healthy Is Sonata Software's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sonata Software had liabilities of ₹26.3b due within 12 months and liabilities of ₹4.15b due beyond that. On the other hand, it had cash of ₹6.95b and ₹17.4b worth of receivables due within a year. So its liabilities total ₹6.14b more than the combination of its cash and short-term receivables.

Of course, Sonata Software has a market capitalization of ₹118.9b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Sonata Software boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Sonata Software

But the bad news is that Sonata Software has seen its EBIT plunge 13% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sonata Software can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sonata Software 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. During the last three years, Sonata Software produced sturdy free cash flow equating to 60% 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

We could understand if investors are concerned about Sonata Software's liabilities, but we can be reassured by the fact it has has net cash of ₹2.53b. So we are not troubled with Sonata Software's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Sonata Software 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.