Is DiGiSPICE Technologies (NSE:DIGISPICE) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest 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 need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, DiGiSPICE Technologies Limited (NSE:DIGISPICE) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for DiGiSPICE Technologies

What Is DiGiSPICE Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that DiGiSPICE Technologies had ₹251.7m of debt in March 2020, down from ₹573.2m, one year before. However, its balance sheet shows it holds ₹1.20b in cash, so it actually has ₹944.8m net cash.

How Strong Is DiGiSPICE Technologies's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DiGiSPICE Technologies had liabilities of ₹1.76b due within 12 months and liabilities of ₹96.8m due beyond that. Offsetting this, it had ₹1.20b in cash and ₹528.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹128.0m.

Of course, DiGiSPICE Technologies has a market capitalization of ₹1.95b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, DiGiSPICE Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is DiGiSPICE Technologies'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.

In the last year DiGiSPICE Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to ₹4.7b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is DiGiSPICE Technologies?

Although DiGiSPICE Technologies had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₹411m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for DiGiSPICE Technologies that you should be aware of.

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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