Here's Why Dynacons Systems & Solutions (NSE:DSSL) Can Manage Its Debt Responsibly

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. We note that Dynacons Systems & Solutions Limited (NSE:DSSL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Dynacons Systems & Solutions

What Is Dynacons Systems & Solutions's Debt?

As you can see below, Dynacons Systems & Solutions had ₹329.8m of debt at September 2024, down from ₹630.8m a year prior. But on the other hand it also has ₹677.7m in cash, leading to a ₹347.9m net cash position.

A Look At Dynacons Systems & Solutions' Liabilities

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 actually has ₹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. Succinctly put, Dynacons Systems & Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Dynacons Systems & Solutions has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Dynacons Systems & Solutions will need earnings to service that debt. 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, 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. Looking at the most recent three years, Dynacons Systems & Solutions recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Dynacons Systems & Solutions has ₹347.9m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 24% over the last year. So we don't think Dynacons Systems & Solutions'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. For example, we've discovered 1 warning sign for Dynacons Systems & Solutions that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.