We Think Allied Digital Services (NSE:ADSL) Can Stay On Top Of Its Debt

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 can see that Allied Digital Services Limited (NSE:ADSL) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. 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

What Is Allied Digital Services's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Allied Digital Services had debt of ₹596.4m, up from ₹351.5m in one year. However, its balance sheet shows it holds ₹1.38b in cash, so it actually has ₹782.5m net cash.

How Strong Is Allied Digital Services' Balance Sheet?

The latest balance sheet data shows that Allied Digital Services had liabilities of ₹1.24b due within a year, and liabilities of ₹348.0m falling due after that. On the other hand, it had cash of ₹1.38b and ₹1.52b worth of receivables due within a year. So it can boast ₹1.31b 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. Succinctly put, Allied Digital Services boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Allied Digital Services saw its EBIT drop by 6.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder 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 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 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 produced sturdy free cash flow equating to 58% 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 Allied Digital Services has ₹782.5m in net cash and a decent-looking balance sheet. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Allied Digital Services that you should be aware of.

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.

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