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. Importantly, Majesco (NASDAQ:MJCO) does carry debt. But should shareholders be worried about its use of debt?
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. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is Majesco's Debt?
The image below, which you can click on for greater detail, shows that Majesco had debt of US$236.0k at the end of June 2019, a reduction from US$13.4m over a year. But it also has US$33.0m in cash to offset that, meaning it has US$32.8m net cash.
How Strong Is Majesco's Balance Sheet?
We can see from the most recent balance sheet that Majesco had liabilities of US$42.1m falling due within a year, and liabilities of US$6.78m due beyond that. Offsetting this, it had US$33.0m in cash and US$37.6m in receivables that were due within 12 months. So it actually has US$21.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Majesco could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Majesco has more cash than debt is arguably a good indication that it can manage its debt safely.
Better yet, Majesco grew its EBIT by 536% 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 Majesco 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Majesco 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 two years, Majesco's free cash flow amounted to 48% 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 Majesco has US$33m in net cash and a decent-looking balance sheet. And we liked the look of last year's 536% year-on-year EBIT growth. So is Majesco's debt a risk? It doesn't seem so to us. We'd be very excited to see if Majesco 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 you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.