Is Happiest Minds Technologies (NSE:HAPPSTMNDS) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 note that Happiest Minds Technologies Limited (NSE:HAPPSTMNDS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

We've discovered 1 warning sign about Happiest Minds Technologies. View them for free.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Happiest Minds Technologies Carry?

The image below, which you can click on for greater detail, shows that Happiest Minds Technologies had debt of ₹2.36b at the end of December 2024, a reduction from ₹5.30b over a year. However, its balance sheet shows it holds ₹17.0b in cash, so it actually has ₹14.7b net cash.

A Look At Happiest Minds Technologies' Liabilities

According to the last reported balance sheet, Happiest Minds Technologies had liabilities of ₹14.7b due within 12 months, and liabilities of ₹3.37b due beyond 12 months. Offsetting these obligations, it had cash of ₹17.0b as well as receivables valued at ₹2.69b due within 12 months. So it actually has ₹1.67b more liquid assets than total liabilities.

This state of affairs indicates that Happiest Minds Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹86.1b company is short on cash, but still worth keeping an eye on the balance sheet. 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.

See our latest analysis for Happiest Minds Technologies

But the other side of the story is that Happiest Minds Technologies saw its EBIT decline by 5.5% over the last year. 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 it is future earnings, more than anything, that will determine Happiest Minds Technologies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Happiest Minds Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Happiest Minds Technologies recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Happiest Minds Technologies has ₹14.7b in net cash and a decent-looking balance sheet. So we don't have any problem with Happiest Minds Technologies's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Happiest Minds Technologies has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.