These 4 Measures Indicate That Allied Digital Services (NSE:ADSL) Is Using Debt Safely

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, Allied Digital Services Limited (NSE:ADSL) does carry debt. But the real question is whether this debt is making the company risky.

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

Check out our latest analysis for Allied Digital Services

How Much Debt Does Allied Digital Services Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Allied Digital Services had debt of ₹690.7m, up from ₹456.8m in one year. But it also has ₹1.72b in cash to offset that, meaning it has ₹1.03b net cash.

A Look At Allied Digital Services' Liabilities

Zooming in on the latest balance sheet data, we can see that Allied Digital Services had liabilities of ₹1.51b due within 12 months and liabilities of ₹481.0m due beyond that. On the other hand, it had cash of ₹1.72b and ₹1.62b worth of receivables due within a year. So it can boast ₹1.35b more liquid assets than total liabilities.

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

And we also note warmly that Allied Digital Services grew its EBIT by 14% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Allied Digital Services 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Allied Digital Services 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, Allied Digital Services generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Allied Digital Services has net cash of ₹1.03b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹940m, being 82% of its EBIT. So is Allied Digital Services's debt a risk? It doesn't seem so to us. 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 Allied Digital Services that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.