Dynacons Systems & Solutions (NSE:DSSL) Has A Pretty Healthy Balance Sheet

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 Dynacons Systems & Solutions Limited (NSE:DSSL) does use debt in its business. 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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dynacons Systems & Solutions

What Is Dynacons Systems & Solutions's Debt?

The image below, which you can click on for greater detail, shows that Dynacons Systems & Solutions had debt of ₹331.9m at the end of March 2024, a reduction from ₹654.3m over a year. However, its balance sheet shows it holds ₹881.0m in cash, so it actually has ₹549.0m net cash.

How Healthy Is Dynacons Systems & Solutions' Balance Sheet?

We can see from the most recent balance sheet that Dynacons Systems & Solutions had liabilities of ₹4.15b falling due within a year, and liabilities of ₹149.5m due beyond that. Offsetting these obligations, it had cash of ₹881.0m as well as receivables valued at ₹4.02b due within 12 months. So it actually has ₹606.7m more liquid assets than total liabilities.

This surplus suggests that Dynacons Systems & Solutions has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Dynacons Systems & Solutions has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Dynacons Systems & Solutions grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Dynacons Systems & Solutions's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Dynacons Systems & Solutions 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, Dynacons Systems & Solutions reported free cash flow worth 16% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Dynacons Systems & Solutions has ₹549.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 44% year-on-year EBIT growth. So is Dynacons Systems & Solutions's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with Dynacons Systems & Solutions .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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