Here’s Why Reliable Data Services (NSE:RELIABLE) Has Significant Leverage
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that Limited Trusted Data Services (NSE: RELIABLE) uses debt in its business. But the more important question is: what risk does this debt create?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest analysis for Reliable Data Services
What is the debt of reliable data services?
The image below, which you can click on for more details, shows that as of September 2021, Reliable Data Services had a debt of ₹140.4m, up from ₹132.9m in a year. However, he has ₹6.91 million in cash to offset this, resulting in a net debt of around ₹133.5 million.
What is the track record of Reliable Data Services?
The latest balance sheet data shows that Reliable Data Services had liabilities of ₹237.7 million due within one year, and liabilities of ₹116.1 million falling due thereafter. On the other hand, it had cash of ₹6.91 million and ₹241.7 million of receivables due within one year. It therefore has liabilities totaling ₹105.2 million more than its cash and short-term receivables, combined.
While that might sound like a lot, it’s not that bad since Reliable Data Services has a market capitalization of ₹423.6 million, and so it could probably bolster its balance sheet by raising capital if needed. But it is clear that it is essential to examine closely whether it can manage its debt without dilution.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.
Reliable Data Services’ net debt is at a very reasonable 2.2 times its EBITDA, while its EBIT covered its interest expense at just 4.3 times last year. While that doesn’t worry us too much, it does suggest that interest payments are a bit of a burden. Unfortunately, Reliable Data Services has seen its EBIT drop by 3.4% over the last twelve months. If this earnings trend continues, its leverage will become heavy like the heart of a polar bear looking at its only cub. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since Reliable Data Services will need revenue to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, a company can only repay its debts with cold hard cash, not with book profits. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Reliable Data Services has experienced substantial negative free cash flow, in total. While investors no doubt expect a reversal of this situation in due course, this clearly means that its use of debt is more risky.
Our point of view
Reflecting on Reliable Data Services’ attempt to convert EBIT to free cash flow, we’re certainly not enthusiastic. But at least his total passive level isn’t that bad. Looking at the balance sheet and taking all of these factors into account, we think the debt makes the Reliable Data Services stock a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, we found 2 warning signs for reliable data services which you should be aware of before investing here.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.