These 4 Measures Indicate That Zeal Global Services (NSE:ZEAL) Is Using Debt Reasonably Well

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. Importantly, Zeal Global Services Limited (NSE:ZEAL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Zeal Global Services

What Is Zeal Global Services's Debt?

You can click the graphic below for the historical numbers, but it shows that Zeal Global Services had ₹166.4m of debt in September 2023, down from ₹173.4m, one year before. But it also has ₹396.4m in cash to offset that, meaning it has ₹230.0m net cash.

How Strong Is Zeal Global Services' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zeal Global Services had liabilities of ₹431.9m due within 12 months and liabilities of ₹3.69m due beyond that. On the other hand, it had cash of ₹396.4m and ₹398.5m worth of receivables due within a year. So it can boast ₹359.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Zeal Global Services could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Zeal Global Services has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Zeal Global Services has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Zeal Global Services 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Zeal Global Services 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. Over the last three years, Zeal Global Services saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zeal Global Services has net cash of ₹230.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 35% year-on-year EBIT growth. So we don't have any problem with Zeal Global Services's use of debt. 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 4 warning signs for Zeal Global Services (2 can't be ignored) you should be aware of.

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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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.