Tera Software (NSE:TERASOFT) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Tera Software Limited (NSE:TERASOFT) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Tera Software

How Much Debt Does Tera Software Carry?

The image below, which you can click on for greater detail, shows that Tera Software had debt of ₹440.5m at the end of September 2022, a reduction from ₹640.9m over a year. However, it also had ₹80.1m in cash, and so its net debt is ₹360.4m.

How Healthy Is Tera Software's Balance Sheet?

The latest balance sheet data shows that Tera Software had liabilities of ₹1.42b due within a year, and liabilities of ₹65.1m falling due after that. Offsetting these obligations, it had cash of ₹80.1m as well as receivables valued at ₹1.79b due within 12 months. So it can boast ₹388.7m more liquid assets than total liabilities.

This surplus liquidity suggests that Tera Software's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. There's no doubt that we learn most about debt from the balance sheet. But it is Tera Software'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.

Over 12 months, Tera Software made a loss at the EBIT level, and saw its revenue drop to ₹1.2b, which is a fall of 12%. That's not what we would hope to see.

Caveat Emptor

Not only did Tera Software's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹83m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Tera Software you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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