Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Mostly, Allsec Technologies Limited (NSE: ALLSEC) is in debt. But the real question is whether this debt makes the business risky.
Why is debt risky?
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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. 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 Allsec Technologies
What is Allsec Technologies’ net debt?
As you can see below, Allsec Technologies had a debt of ₹172.5 million as of September 2021, up from ₹183.1 million the previous year. But on the other hand, it also has ₹1.80 billion in cash, resulting in a net cash position of ₹1.62 billion.
How strong is Allsec Technologies’ balance sheet?
We can see from the most recent balance sheet that Allsec Technologies had liabilities of ₹409.7m due within a year, and liabilities of ₹159.2m due beyond. As compensation for these obligations, it had cash of ₹1.80 billion as well as receivables valued at ₹436.0 million due within 12 months. So he actually has ₹1.66 billion Continued liquid assets than total liabilities.
This surplus suggests that Allsec Technologies is using debt in a way that seems both safe and conservative. Given that he has easily sufficient short-term cash, we don’t think he will have any problems with his lenders. Simply put, the fact that Allsec Technologies has more cash than debt is arguably a good indication that it can safely manage its debt.
In addition, Allsec Technologies has increased its EBIT by 40% over the last twelve months, and this growth will facilitate the management of its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since Allsec Technologies 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 cash, not book profits. Although Allsec Technologies has net cash on its balance sheet, it is always worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it is building (or erodes) that treasury. balance. Fortunately for all shareholders, Allsec Technologies has actually produced more free cash flow than EBIT for the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Abstract
While we sympathize with investors who find debt a concern, you should bear in mind that Allsec Technologies has a net cash position of ₹1.62 billion, as well as more liquid assets than liabilities. And it impressed us with a free cash flow of ₹650m, or 111% of its EBIT. Ultimately, we don’t find Allsec Technologies’ debt levels to be a cause for concern at all. 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, Allsec Technologies has 4 warning signs (and 1 which is a little worrying) that we think you should know about.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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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.
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