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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.' 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. As with many other companies Newgen Software Technologies Limited (NSE:NEWGEN) makes use of debt. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Newgen Software Technologies
What Is Newgen Software Technologies's Debt?
As you can see below, at the end of March 2019, Newgen Software Technologies had ₹677.3m of debt, up from ₹626.3m a year ago. Click the image for more detail. But on the other hand it also has ₹2.31b in cash, leading to a ₹1.63b net cash position.
How Strong Is Newgen Software Technologies's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Newgen Software Technologies had liabilities of ₹2.16b due within 12 months and liabilities of ₹296.9m due beyond that. On the other hand, it had cash of ₹2.31b and ₹3.16b worth of receivables due within a year. So it actually has ₹3.01b more liquid assets than total liabilities.
This surplus suggests that Newgen Software Technologies is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Newgen Software Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Newgen Software Technologies has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. 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 Newgen Software Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.