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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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.

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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. 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.

What Is Dynacons Systems & Solutions's Net Debt?

The chart below, which you can click on for greater detail, shows that Dynacons Systems & Solutions had ₹676.1m in debt in September 2024; about the same as the year before. However, it does have ₹677.7m in cash offsetting this, leading to net cash of ₹1.66m.

How Healthy Is Dynacons Systems & Solutions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dynacons Systems & Solutions had liabilities of ₹3.24b due within 12 months and liabilities of ₹352.5m due beyond that. Offsetting these obligations, it had cash of ₹677.7m as well as receivables valued at ₹4.01b due within 12 months. So it can boast ₹1.09b 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.

See our latest analysis for Dynacons Systems & Solutions

Also positive, Dynacons Systems & Solutions grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. In the last three years, Dynacons Systems & Solutions's free cash flow amounted to 27% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Dynacons Systems & Solutions has ₹1.66m in net cash and a decent-looking balance sheet. And we liked the look of last year's 24% year-on-year EBIT growth. So is Dynacons Systems & Solutions's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Dynacons Systems & Solutions's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.