These 4 Measures Indicate That One Point One Solutions (NSE:ONEPOINT) Is Using Debt Safely

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 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, One Point One Solutions Limited (NSE:ONEPOINT) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for One Point One Solutions

What Is One Point One Solutions's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 One Point One Solutions had debt of ₹182.2m, up from ₹147.5m in one year. On the flip side, it has ₹24.6m in cash leading to net debt of about ₹157.5m.

How Healthy Is One Point One Solutions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that One Point One Solutions had liabilities of ₹501.8m due within 12 months and liabilities of ₹306.3m due beyond that. Offsetting these obligations, it had cash of ₹24.6m as well as receivables valued at ₹391.2m due within 12 months. So it has liabilities totalling ₹392.3m more than its cash and near-term receivables, combined.

Since publicly traded One Point One Solutions shares are worth a total of ₹4.44b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Looking at its net debt to EBITDA of 0.48 and interest cover of 2.7 times, it seems to us that One Point One Solutions is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Notably, One Point One Solutions's EBIT launched higher than Elon Musk, gaining a whopping 132% on last year. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since One Point One Solutions will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, One Point One Solutions actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

The good news is that One Point One Solutions's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But we must concede we find its interest cover has the opposite effect. Zooming out, One Point One Solutions seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with One Point One Solutions .

If, after all that, you're more interested in a fast 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 using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused 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.