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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 Saksoft Limited (NSE:SAKSOFT) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Saksoft
How Much Debt Does Saksoft Carry?
The image below, which you can click on for greater detail, shows that Saksoft had debt of ₹409.0m at the end of March 2019, a reduction from ₹484.4m over a year. On the flip side, it has ₹400.6m in cash leading to net debt of about ₹8.46m.
How Strong Is Saksoft's Balance Sheet?
The latest balance sheet data shows that Saksoft had liabilities of ₹630.6m due within a year, and liabilities of ₹352.8m falling due after that. Offsetting these obligations, it had cash of ₹400.6m as well as receivables valued at ₹716.5m due within 12 months. So it actually has ₹133.6m more liquid assets than total liabilities.
This short term liquidity is a sign that Saksoft could probably pay off its debt with ease, as its balance sheet is far from stretched. But either way, Saksoft has virtually no net debt, so it's fair to say it does not have a heavy debt load!
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Saksoft has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.014 and EBIT of 13.4 times the interest expense. Indeed relative to its earnings its debt load seems light as a feather. In addition to that, we're happy to report that Saksoft has boosted its EBIT by 44%, 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 Saksoft 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.