Zen Technologies (NSE:ZENTEC) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Zen Technologies Limited (NSE:ZENTEC) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Zen Technologies

What Is Zen Technologies's Debt?

As you can see below, at the end of September 2024, Zen Technologies had ₹588.1m of debt, up from ₹4.74m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹11.1b in cash, so it actually has ₹10.5b net cash.

How Strong Is Zen Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zen Technologies had liabilities of ₹2.52b due within 12 months and liabilities of ₹537.7m due beyond that. On the other hand, it had cash of ₹11.1b and ₹4.24b worth of receivables due within a year. So it can boast ₹12.2b 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. Simply put, the fact that Zen Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Zen Technologies grew its EBIT by 107% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Zen Technologies can strengthen its balance sheet over time. 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 Zen 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. Considering the last three years, Zen Technologies actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zen Technologies has net cash of ₹10.5b, as well as more liquid assets than liabilities. And we liked the look of last year's 107% year-on-year EBIT growth. So we are not troubled with Zen Technologies's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Zen Technologies you should be aware of, and 1 of them is potentially serious.

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.