Happiest Minds Technologies (NSE:HAPPSTMNDS) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Happiest Minds Technologies Limited (NSE:HAPPSTMNDS) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for Happiest Minds Technologies

How Much Debt Does Happiest Minds Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Happiest Minds Technologies had ₹5.30b of debt, an increase on ₹3.93b, over one year. However, it does have ₹11.4b in cash offsetting this, leading to net cash of ₹6.07b.

How Healthy Is Happiest Minds Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Happiest Minds Technologies had liabilities of ₹5.83b due within 12 months and liabilities of ₹2.26b due beyond that. Offsetting these obligations, it had cash of ₹11.4b as well as receivables valued at ₹2.34b due within 12 months. So it can boast ₹5.62b more liquid assets than total liabilities.

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

On the other hand, Happiest Minds Technologies saw its EBIT drop by 4.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Happiest Minds Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Happiest Minds Technologies 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 most recent three years, Happiest Minds Technologies recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Happiest Minds Technologies has net cash of ₹6.07b, as well as more liquid assets than liabilities. So we don't have any problem with Happiest Minds Technologies's use of debt. 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 2 warning signs for Happiest Minds Technologies 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.