Symphony (NSE:SYMPHONY) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Symphony Limited (NSE:SYMPHONY) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Symphony

What Is Symphony's Net Debt?

The image below, which you can click on for greater detail, shows that Symphony had debt of ₹1.51b at the end of September 2022, a reduction from ₹2.02b over a year. However, it does have ₹5.71b in cash offsetting this, leading to net cash of ₹4.20b.

How Strong Is Symphony's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Symphony had liabilities of ₹4.74b due within 12 months and liabilities of ₹1.37b due beyond that. On the other hand, it had cash of ₹5.71b and ₹620.0m worth of receivables due within a year. So it can boast ₹220.0m 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 it's very unlikely that the ₹67.7b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Symphony has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Symphony grew its EBIT by 8.6% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 76% 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 it is always sensible to investigate a company's debt, in this case Symphony has ₹4.20b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹2.8b, being 76% of its EBIT. So we don't think Symphony's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Symphony 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.

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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.