Accelya Solutions India (NSE:ACCELYA) Has A Rock Solid 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 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 can see that Accelya Solutions India Limited (NSE:ACCELYA) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Accelya Solutions India

What Is Accelya Solutions India's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Accelya Solutions India had ₹200.2m of debt in December 2022, down from ₹342.3m, one year before. But it also has ₹946.1m in cash to offset that, meaning it has ₹745.9m net cash.

How Strong Is Accelya Solutions India's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Accelya Solutions India had liabilities of ₹886.8m due within 12 months and liabilities of ₹121.7m due beyond that. Offsetting these obligations, it had cash of ₹946.1m as well as receivables valued at ₹939.6m due within 12 months. So it actually has ₹877.2m more liquid assets than total liabilities.

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

On top of that, Accelya Solutions India grew its EBIT by 62% over the last twelve months, and that growth will make it easier to handle its debt. 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 Accelya Solutions India will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Accelya Solutions India actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Accelya Solutions India has net cash of ₹745.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in ₹1.2b. So we don't think Accelya Solutions India'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 example Accelya Solutions India has 3 warning signs (and 2 which are concerning) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.