These 4 Measures Indicate That Dixon Technologies (India) (NSE:DIXON) Is Using Debt Reasonably Well

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, Dixon Technologies (India) Limited (NSE:DIXON) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. 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. 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 Dixon Technologies (India)

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

As you can see below, Dixon Technologies (India) had ₹1.83b of debt at March 2023, down from ₹4.58b a year prior. But it also has ₹2.59b in cash to offset that, meaning it has ₹765.6m net cash.

How Strong Is Dixon Technologies (India)'s Balance Sheet?

According to the last reported balance sheet, Dixon Technologies (India) had liabilities of ₹29.4b due within 12 months, and liabilities of ₹4.54b due beyond 12 months. Offsetting this, it had ₹2.59b in cash and ₹17.2b in receivables that were due within 12 months. So it has liabilities totalling ₹14.2b more than its cash and near-term receivables, combined.

Since publicly traded Dixon Technologies (India) shares are worth a total of ₹242.3b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

On top of that, Dixon Technologies (India) grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Dixon Technologies (India) 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. Over the last three years, Dixon Technologies (India) reported free cash flow worth 13% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish 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 ₹765.6m. And it impressed us with its EBIT growth of 35% over the last year. So we don't have any problem with Dixon Technologies (India)'s use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Dixon Technologies (India)'s earnings per share history for free.

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.