Is FCS Software Solutions (NSE:FCSSOFT) 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 FCS Software Solutions Limited (NSE:FCSSOFT) makes use of debt. 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. 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 FCS Software Solutions

What Is FCS Software Solutions's Debt?

You can click the graphic below for the historical numbers, but it shows that FCS Software Solutions had ₹259.0m of debt in September 2020, down from ₹286.4m, one year before. On the flip side, it has ₹47.5m in cash leading to net debt of about ₹211.5m.

A Look At FCS Software Solutions's Liabilities

We can see from the most recent balance sheet that FCS Software Solutions had liabilities of ₹95.1m falling due within a year, and liabilities of ₹287.5m due beyond that. Offsetting this, it had ₹47.5m in cash and ₹59.1m in receivables that were due within 12 months. So it has liabilities totalling ₹276.0m more than its cash and near-term receivables, combined.

This deficit isn't so bad because FCS Software Solutions is worth ₹1.11b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, FCS Software Solutions made a loss at the EBIT level, and saw its revenue drop to ₹379m, which is a fall of 11%. 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). Its EBIT loss was a whopping ₹115m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₹6.7m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. Be aware that FCS Software Solutions is showing 4 warning signs in our investment analysis , and 2 of those are a bit unpleasant...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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