Here's Why Symphony (NSE:SYMPHONY) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Symphony Limited (NSE:SYMPHONY) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Symphony had ₹2.21b of debt, an increase on ₹1.84b, over one year. However, it does have ₹3.99b in cash offsetting this, leading to net cash of ₹1.78b.

How Healthy Is Symphony's Balance Sheet?

According to the last reported balance sheet, Symphony had liabilities of ₹3.63b due within 12 months, and liabilities of ₹1.59b due beyond 12 months. On the other hand, it had cash of ₹3.99b and ₹2.08b worth of receivables due within a year. So it can boast ₹850.0m more liquid assets than total liabilities.

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 while it's hard to imagine that the ₹71.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Symphony boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Symphony grew its EBIT at 13% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Symphony 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Symphony 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. Over the most recent three years, Symphony recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Symphony has net cash of ₹1.78b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 13% in the last twelve months. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Symphony .

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. 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.