Here's Why Vinsys IT Services India (NSE:VINSYS) Can Manage Its Debt Responsibly

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, Vinsys IT Services India Limited (NSE:VINSYS) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Vinsys IT Services India

What Is Vinsys IT Services India's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Vinsys IT Services India had debt of ₹258.8m, up from ₹231.1m in one year. But it also has ₹314.8m in cash to offset that, meaning it has ₹56.0m net cash.

How Healthy Is Vinsys IT Services India's Balance Sheet?

The latest balance sheet data shows that Vinsys IT Services India had liabilities of ₹176.5m due within a year, and liabilities of ₹255.2m falling due after that. Offsetting this, it had ₹314.8m in cash and ₹441.4m in receivables that were due within 12 months. So it can boast ₹324.6m more liquid assets than total liabilities.

This surplus suggests that Vinsys IT Services India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Vinsys IT Services India has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Vinsys IT Services India grew its EBIT by 116% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Vinsys IT Services India 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Vinsys IT Services 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. Considering the last three years, Vinsys IT Services India actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Vinsys IT Services India has net cash of ₹56.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 116% year-on-year EBIT growth. So is Vinsys IT Services India's debt a risk? It doesn't seem so to us. 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 1 warning sign for Vinsys IT Services India 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.