Is DiGiSPICE Technologies (NSE:DIGISPICE) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies DiGiSPICE Technologies Limited (NSE:DIGISPICE) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for DiGiSPICE Technologies

What Is DiGiSPICE Technologies's Net Debt?

As you can see below, DiGiSPICE Technologies had ₹293.0m of debt at September 2020, down from ₹539.1m a year prior. But it also has ₹2.11b in cash to offset that, meaning it has ₹1.82b net cash.

How Strong Is DiGiSPICE Technologies's Balance Sheet?

The latest balance sheet data shows that DiGiSPICE Technologies had liabilities of ₹2.33b due within a year, and liabilities of ₹90.1m falling due after that. On the other hand, it had cash of ₹2.11b and ₹438.6m worth of receivables due within a year. So it can boast ₹128.9m more liquid assets than total liabilities.

This short term liquidity is a sign that DiGiSPICE Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, DiGiSPICE Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since DiGiSPICE Technologies will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year DiGiSPICE Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to ₹5.4b. With any luck the company will be able to grow its way to profitability.

So How Risky Is DiGiSPICE Technologies?

Although DiGiSPICE Technologies had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₹1.0b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 30% is a good sign. We'd see further strong growth as an optimistic indication. 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 example, we've discovered 2 warning signs for DiGiSPICE Technologies that you should be aware of before investing here.

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.

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