SIS (NSE:SIS) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, SIS Limited (NSE:SIS) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SIS

What Is SIS's Net Debt?

You can click the graphic below for the historical numbers, but it shows that SIS had ₹4.68b of debt in September 2020, down from ₹11.2b, one year before. However, it does have ₹13.6b in cash offsetting this, leading to net cash of ₹8.94b.

How Strong Is SIS' Balance Sheet?

According to the last reported balance sheet, SIS had liabilities of ₹26.8b due within 12 months, and liabilities of ₹7.78b due beyond 12 months. On the other hand, it had cash of ₹13.6b and ₹12.0b worth of receivables due within a year. So its liabilities total ₹9.04b more than the combination of its cash and short-term receivables.

Since publicly traded SIS shares are worth a total of ₹63.5b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, SIS boasts net cash, so it's fair to say it does not have a heavy debt load!

SIS grew its EBIT by 9.4% 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 SIS's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. SIS may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, SIS produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While SIS does have more liabilities than liquid assets, it also has net cash of ₹8.94b. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in ₹4.9b. So we don't have any problem with SIS's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for SIS you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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