Does Dixon Technologies (India) (NSE:DIXON) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Dixon Technologies (India) Limited (NSE:DIXON) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Dixon Technologies (India)

What Is Dixon Technologies (India)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that Dixon Technologies (India) had ₹827.4m of debt in March 2020, down from ₹1.41b, one year before. However, its balance sheet shows it holds ₹1.31b in cash, so it actually has ₹486.8m net cash.

A Look At Dixon Technologies (India)'s Liabilities

We can see from the most recent balance sheet that Dixon Technologies (India) had liabilities of ₹10.3b falling due within a year, and liabilities of ₹1.22b due beyond that. Offsetting these obligations, it had cash of ₹1.31b as well as receivables valued at ₹5.15b due within 12 months. So its liabilities total ₹5.1b more than the combination of its cash and short-term receivables.

Given Dixon Technologies (India) has a market capitalization of ₹92.8b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Dixon Technologies (India) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Dixon Technologies (India) grew its EBIT by 8.4% in the last year. That's far from incredible but it is a good thing, when it comes to paying off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Dixon Technologies (India)'s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Dixon Technologies (India) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Dixon Technologies (India) reported free cash flow worth 18% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

We could understand if investors are concerned about Dixon Technologies (India)'s liabilities, but we can be reassured by the fact it has has net cash of ₹486.8m. And it also grew its EBIT by 8.4% over the last year. So we don't have any problem with Dixon Technologies (India)'s use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Dixon Technologies (India) is showing 3 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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