These 4 Measures Indicate That Zensar Technologies (NSE:ZENSARTECH) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Zensar Technologies Limited (NSE:ZENSARTECH) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Zensar Technologies

What Is Zensar Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Zensar Technologies had ₹2.73b of debt in March 2023, down from ₹3.35b, one year before. However, it does have ₹11.7b in cash offsetting this, leading to net cash of ₹9.00b.

How Healthy Is Zensar Technologies' Balance Sheet?

The latest balance sheet data shows that Zensar Technologies had liabilities of ₹8.58b due within a year, and liabilities of ₹2.87b falling due after that. On the other hand, it had cash of ₹11.7b and ₹10.6b worth of receivables due within a year. So it can boast ₹10.8b more liquid assets than total liabilities.

This surplus suggests that Zensar Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zensar Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

While Zensar Technologies doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Zensar Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Zensar Technologies 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. Happily for any shareholders, Zensar Technologies actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zensar Technologies has ₹9.00b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 113% of that EBIT to free cash flow, bringing in ₹6.8b. So we don't think Zensar Technologies's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Zensar Technologies that you should be aware of.

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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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.