Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that CyberTech Systems and Software Limited ( NSE:CYBERTECH ) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is CyberTech Systems and Software's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 CyberTech Systems and Software had ₹178.4m of debt, an increase on ₹109.3m, over one year. But on the other hand it also has ₹361.9m in cash, leading to a ₹183.6m net cash position.
A Look At CyberTech Systems and Software's Liabilities
The latest balance sheet data shows that CyberTech Systems and Software had liabilities of ₹448.8m due within a year, and liabilities of ₹41.6m falling due after that. Offsetting these obligations, it had cash of ₹361.9m as well as receivables valued at ₹247.4m due within 12 months. So it actually has ₹118.8m more liquid assets than total liabilities.
This short term liquidity is a sign that CyberTech Systems and Software could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, CyberTech Systems and Software boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, CyberTech Systems and Software grew its EBIT by 276% 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 you can't view debt in total isolation; since CyberTech Systems and Software 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 .
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. CyberTech Systems and Software 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. In the last three years, CyberTech Systems and Software's free cash flow amounted to 34% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
While it is always sensible to investigate a company's debt, in this case CyberTech Systems and Software has ₹184m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 276% over the last year. So we don't think CyberTech Systems and Software's use of debt is risky. We'd be very excited to see if CyberTech Systems and Software insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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