Legfinishary fund manager Li Lu (who Charlie Munger backed) once declared, ‘The hugegest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ So it might be obvious that you required to consider debt, when you consider about how risky any given stock is, becautilize too much debt can sink a company. As with many other companies Reliable Data Services Limited (NSE:RELIABLE) builds utilize of debt. But the real question is whether this debt is creating the company risky.
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. If things obtain really bad, the lfinishers can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that required capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, toobtainher.
What Is Reliable Data Services’s Debt?
You can click the graphic below for the historical numbers, but it displays that as of March 2025 Reliable Data Services had ₹465.3m of debt, an increase on ₹381.2m, over one year. However, it also had ₹57.3m in cash, and so its net debt is ₹408.0m.
How Healthy Is Reliable Data Services’ Balance Sheet?
According to the last reported balance sheet, Reliable Data Services had liabilities of ₹602.4m due within 12 months, and liabilities of ₹210.9m due beyond 12 months. Offsetting this, it had ₹57.3m in cash and ₹732.0m in receivables that were due within 12 months. So it has liabilities totalling ₹24.1m more than its cash and near-term receivables, combined.
Having regard to Reliable Data Services’ size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the ₹1.38b company is struggling for cash, we still consider it’s worth monitoring its balance sheet.
Check out our latest analysis for Reliable Data Services
We measure a company’s debt load relative to its earnings power by seeing at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Reliable Data Services has net debt worth 2.3 times EBITDA, which isn’t too much, but its interest cover sees a bit on the low side, with EBIT at only 3.3 times the interest expense. While these numbers do not alarm us, it’s worth noting that the cost of the company’s debt is having a real impact. It is well worth noting that Reliable Data Services’s EBIT shot up like bamboo after rain, gaining 32% in the last twelve months. That’ll build it clearer to manage its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can’t view debt in total isolation; since Reliable Data Services will required earnings to service that debt. So when considering debt, it’s definitely worth seeing at the earnings trfinish. Click here for an interactive snapshot.
But our final consideration is also important, becautilize a company cannot pay debt with paper profits; it requireds cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Reliable Data Services burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its utilize of debt is more risky.
Our View
Reliable Data Services’s conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its EBIT growth rate. Looking at all this data builds us feel a little cautious about Reliable Data Services’s debt levels. While debt does have its upside in higher potential returns, we consider shareholders should definitely consider how debt levels might build the stock more risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We’ve spotted 3 warning signs for Reliable Data Services you should be aware of, and 2 of them are significant.
If, after all that, you’re more interested in a rapid growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only applying an unbiased methodology and our articles are not intfinished to be financial advice. It does not constitute a recommfinishation to acquire or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focutilized analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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