Tera Software (NSE:TERASOFT) Is Making Moderate Use Of 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. We can see that Tera Software Limited (NSE:TERASOFT) does use debt in its business. But should shareholders be worried about its use of debt?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Tera Software

What Is Tera Software's Debt?

You can click the graphic below for the historical numbers, but it shows that Tera Software had ₹241.5m of debt in March 2023, down from ₹605.4m, one year before. However, it also had ₹160.1m in cash, and so its net debt is ₹81.4m.

How Strong Is Tera Software's Balance Sheet?

The latest balance sheet data shows that Tera Software had liabilities of ₹828.9m due within a year, and liabilities of ₹65.1m falling due after that. Offsetting these obligations, it had cash of ₹160.1m as well as receivables valued at ₹1.35b due within 12 months. So it can boast ₹612.1m more liquid assets than total liabilities.

This luscious liquidity implies that Tera Software's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tera Software 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.

In the last year Tera Software had a loss before interest and tax, and actually shrunk its revenue by 6.6%, to ₹1.2b. We would much prefer see growth.

Caveat Emptor

Importantly, Tera Software had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₹63m 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. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Tera Software (including 2 which are concerning) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.