Is Birlasoft (NSE:BSOFT) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Birlasoft Limited (NSE:BSOFT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Birlasoft

What Is Birlasoft's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Birlasoft had ₹931.8m of debt in March 2024, down from ₹1.02b, one year before. However, it does have ₹14.5b in cash offsetting this, leading to net cash of ₹13.6b.

A Look At Birlasoft's Liabilities

Zooming in on the latest balance sheet data, we can see that Birlasoft had liabilities of ₹7.46b due within 12 months and liabilities of ₹1.36b due beyond that. Offsetting this, it had ₹14.5b in cash and ₹11.9b in receivables that were due within 12 months. So it can boast ₹17.7b more liquid assets than total liabilities.

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

In addition to that, we're happy to report that Birlasoft has boosted its EBIT by 64%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Birlasoft'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 company can only pay off debt with cold hard cash, not accounting profits. Birlasoft 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. Over the last three years, Birlasoft recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Birlasoft has net cash of ₹13.6b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹6.9b, being 88% of its EBIT. So we don't think Birlasoft's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Birlasoft 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.