Does Symphony (NSE:SYMPHONY) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Symphony Limited (NSE:SYMPHONY) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Symphony

What Is Symphony's Debt?

The image below, which you can click on for greater detail, shows that Symphony had debt of ₹1.47b at the end of March 2024, a reduction from ₹1.97b over a year. But on the other hand it also has ₹1.80b in cash, leading to a ₹330.0m net cash position.

How Healthy Is Symphony's Balance Sheet?

We can see from the most recent balance sheet that Symphony had liabilities of ₹3.85b falling due within a year, and liabilities of ₹840.0m due beyond that. Offsetting these obligations, it had cash of ₹1.80b as well as receivables valued at ₹1.68b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.21b.

This state of affairs indicates that Symphony's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹74.8b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Symphony boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Symphony 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 it is future earnings, more than anything, that will determine Symphony'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. Symphony 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, Symphony recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Symphony's liabilities, but we can be reassured by the fact it has has net cash of ₹330.0m. And it impressed us with free cash flow of ₹1.5b, being 81% of its EBIT. So we don't think Symphony's use of debt is risky. 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. For instance, we've identified 1 warning sign for Symphony that you should be aware of.

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.