Accelya Solutions India (NSE:ACCELYA) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Accelya Solutions India Limited (NSE:ACCELYA) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Accelya Solutions India

What Is Accelya Solutions India's Net Debt?

As you can see below, Accelya Solutions India had ₹388.5m of debt at June 2021, down from ₹494.6m a year prior. But on the other hand it also has ₹746.0m in cash, leading to a ₹357.5m net cash position.

How Healthy Is Accelya Solutions India's Balance Sheet?

We can see from the most recent balance sheet that Accelya Solutions India had liabilities of ₹710.4m falling due within a year, and liabilities of ₹338.8m due beyond that. Offsetting these obligations, it had cash of ₹746.0m as well as receivables valued at ₹1.05b due within 12 months. So it actually has ₹744.7m more liquid assets than total liabilities.

This surplus suggests that Accelya Solutions India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Accelya Solutions India boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Accelya Solutions India's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Accelya Solutions India'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. While Accelya Solutions India 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. During the last three years, Accelya Solutions India produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. 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 Accelya Solutions India has ₹357.5m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in ₹680m. So we don't have any problem with Accelya Solutions India's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Accelya Solutions India that 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.