FDC (NSE:FDC) Seems To Use Debt Quite Sensibly

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.' 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. We note that FDC Limited (NSE:FDC) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for FDC

How Much Debt Does FDC Carry?

As you can see below, FDC had ₹283.2m of debt at March 2023, down from ₹322.0m a year prior. However, it does have ₹4.82b in cash offsetting this, leading to net cash of ₹4.54b.

A Look At FDC's Liabilities

We can see from the most recent balance sheet that FDC had liabilities of ₹3.12b falling due within a year, and liabilities of ₹499.8m due beyond that. On the other hand, it had cash of ₹4.82b and ₹1.24b worth of receivables due within a year. So it can boast ₹2.45b more liquid assets than total liabilities.

This short term liquidity is a sign that FDC could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that FDC has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that FDC has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since FDC will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. FDC 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. Looking at the most recent three years, FDC recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that FDC has net cash of ₹4.54b, as well as more liquid assets than liabilities. And we liked the look of last year's 43% year-on-year EBIT growth. So we don't think FDC'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. For instance, we've identified 1 warning sign for FDC that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.