We Think Dixon Technologies (India) (NSE:DIXON) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Dixon Technologies (India) Limited (NSE:DIXON) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dixon Technologies (India)

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

As you can see below, at the end of March 2021, Dixon Technologies (India) had ₹1.47b of debt, up from ₹866.7m a year ago. Click the image for more detail. But it also has ₹1.76b in cash to offset that, meaning it has ₹292.6m net cash.

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

Zooming in on the latest balance sheet data, we can see that Dixon Technologies (India) had liabilities of ₹18.7b due within 12 months and liabilities of ₹2.38b due beyond that. Offsetting these obligations, it had cash of ₹1.76b as well as receivables valued at ₹10.9b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹8.41b.

Given Dixon Technologies (India) has a market capitalization of ₹259.2b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Dixon Technologies (India) boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Dixon Technologies (India) has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Dixon Technologies (India) can strengthen its balance sheet over time. 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 8.5% 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 ₹292.6m. And we liked the look of last year's 27% year-on-year EBIT growth. So we are not troubled with Dixon Technologies (India)'s debt use. 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 example, we've discovered 2 warning signs for Dixon Technologies (India) (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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