Here's Why InfoBeans Technologies (NSE:INFOBEAN) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that InfoBeans Technologies Limited (NSE:INFOBEAN) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for InfoBeans Technologies

How Much Debt Does InfoBeans Technologies Carry?

The image below, which you can click on for greater detail, shows that InfoBeans Technologies had debt of ₹281.1m at the end of March 2022, a reduction from ₹490.1m over a year. However, its balance sheet shows it holds ₹646.4m in cash, so it actually has ₹365.3m net cash.

A Look At InfoBeans Technologies' Liabilities

The latest balance sheet data shows that InfoBeans Technologies had liabilities of ₹1.15b due within a year, and liabilities of ₹688.8m falling due after that. On the other hand, it had cash of ₹646.4m and ₹652.6m worth of receivables due within a year. So it has liabilities totalling ₹537.4m more than its cash and near-term receivables, combined.

Given InfoBeans Technologies has a market capitalization of ₹13.1b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, InfoBeans Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, InfoBeans Technologies grew its EBIT by 115% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since InfoBeans Technologies 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, a company can only pay off debt with cold hard cash, not accounting profits. While InfoBeans 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 last three years, InfoBeans Technologies saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about InfoBeans Technologies's liabilities, but we can be reassured by the fact it has has net cash of ₹365.3m. And we liked the look of last year's 115% year-on-year EBIT growth. So we are not troubled with InfoBeans Technologies's debt use. We'd be motivated to research the stock further if we found out that InfoBeans Technologies insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.