These 4 Measures Indicate That Zen Technologies (NSE:ZENTEC) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Zen Technologies Limited (NSE:ZENTEC) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zen Technologies

How Much Debt Does Zen Technologies Carry?

As you can see below, at the end of March 2022, Zen Technologies had ₹147.6m of debt, up from ₹18.9m a year ago. Click the image for more detail. But it also has ₹2.02b in cash to offset that, meaning it has ₹1.88b net cash.

How Strong Is Zen Technologies' Balance Sheet?

The latest balance sheet data shows that Zen Technologies had liabilities of ₹719.6m due within a year, and liabilities of ₹71.0m falling due after that. Offsetting this, it had ₹2.02b in cash and ₹337.4m in receivables that were due within 12 months. So it can boast ₹1.57b more liquid assets than total liabilities.

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

Better yet, Zen Technologies grew its EBIT by 478% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zen Technologies's earnings that will influence how the balance sheet holds up in the future. 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. Zen Technologies 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. Looking at the most recent three years, Zen Technologies recorded free cash flow of 20% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zen Technologies has ₹1.88b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 478% over the last year. So is Zen Technologies's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Zen Technologies , and understanding them should be part of your investment process.

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.