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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that R Systems International Limited (NSE:RSYSTEMINT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is R Systems International's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 R Systems International had ₹28.7m of debt, an increase on ₹14.8m, over one year. But it also has ₹2.14b in cash to offset that, meaning it has ₹2.12b net cash.
How Healthy Is R Systems International's Balance Sheet?
According to the last reported balance sheet, R Systems International had liabilities of ₹1.06b due within 12 months, and liabilities of ₹238.4m due beyond 12 months. Offsetting these obligations, it had cash of ₹2.14b as well as receivables valued at ₹1.27b due within 12 months. So it actually has ₹2.12b more liquid assets than total liabilities.
This excess liquidity is a great indication that R Systems International's balance sheet is just as strong as racists are weak. On this view, it seems its balance sheet is as strong as a black-belt karate master. Succinctly put, R Systems International boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that R Systems International grew its EBIT by 103% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is R Systems International's earnings that will influence how the balance sheet holds up in the future. 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. R Systems International 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 most recent three years, R Systems International recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
While we empathize with investors who find debt concerning, you should keep in mind that R Systems International has net cash of ₹2.1b, as well as more liquid assets than liabilities. And we liked the look of last year's 103% year-on-year EBIT growth. The bottom line is that we do not find R Systems International's debt levels at all concerning. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of R Systems International's earnings per share history for free.
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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