These 4 Measures Indicate That Birlasoft (NSE:BSOFT) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Birlasoft Limited (NSE:BSOFT) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Birlasoft

What Is Birlasoft's Net Debt?

As you can see below, Birlasoft had ₹856.9m of debt at September 2023, down from ₹1.18b a year prior. However, its balance sheet shows it holds ₹14.0b in cash, so it actually has ₹13.2b net cash.

A Look At Birlasoft's Liabilities

The latest balance sheet data shows that Birlasoft had liabilities of ₹7.17b due within a year, and liabilities of ₹1.08b falling due after that. Offsetting this, it had ₹14.0b in cash and ₹9.43b in receivables that were due within 12 months. So it can boast ₹15.2b more liquid assets than total liabilities.

This short term liquidity is a sign that Birlasoft could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Birlasoft boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Birlasoft grew its EBIT by 56% over the last twelve months, and that growth will make it easier to handle its debt. 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. While Birlasoft 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, Birlasoft generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd 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 ₹13.2b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹7.5b, being 86% 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. Be aware that Birlasoft is showing 2 warning signs in our investment analysis , 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.

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.