FCS Software Solutions (NSE:FCSSOFT) Is Making Moderate Use Of 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.' 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 FCS Software Solutions Limited (NSE:FCSSOFT) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for FCS Software Solutions

What Is FCS Software Solutions's Net Debt?

You can click the graphic below for the historical numbers, but it shows that FCS Software Solutions had ₹241.0m of debt in September 2021, down from ₹259.0m, one year before. However, it does have ₹16.2m in cash offsetting this, leading to net debt of about ₹224.8m.

How Healthy Is FCS Software Solutions' Balance Sheet?

We can see from the most recent balance sheet that FCS Software Solutions had liabilities of ₹109.4m falling due within a year, and liabilities of ₹253.9m due beyond that. Offsetting these obligations, it had cash of ₹16.2m as well as receivables valued at ₹65.0m due within 12 months. So it has liabilities totalling ₹282.0m more than its cash and near-term receivables, combined.

Of course, FCS Software Solutions has a market capitalization of ₹3.76b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since FCS Software 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.

In the last year FCS Software Solutions had a loss before interest and tax, and actually shrunk its revenue by 16%, to ₹319m. That's not what we would hope to see.

Caveat Emptor

Not only did FCS Software Solutions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹23m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₹145m into a profit. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for FCS Software Solutions that you should be aware of.

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.

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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