Does Inspirisys Solutions (NSE:INSPIRISYS) Have A 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.' 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. As with many other companies Inspirisys Solutions Limited (NSE:INSPIRISYS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Inspirisys Solutions

What Is Inspirisys Solutions's Debt?

The image below, which you can click on for greater detail, shows that Inspirisys Solutions had debt of ₹359.5m at the end of March 2021, a reduction from ₹1.32b over a year. However, it also had ₹357.8m in cash, and so its net debt is ₹1.70m.

How Strong Is Inspirisys Solutions' Balance Sheet?

We can see from the most recent balance sheet that Inspirisys Solutions had liabilities of ₹2.17b falling due within a year, and liabilities of ₹150.3m due beyond that. On the other hand, it had cash of ₹357.8m and ₹937.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.03b.

While this might seem like a lot, it is not so bad since Inspirisys Solutions has a market capitalization of ₹2.40b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. But either way, Inspirisys Solutions has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Inspirisys Solutions's debt of just 0.0097 times EBITDA is clearly modest. But strangely, EBIT was only 1.1 times interest expenses, suggesting the that may paint an overly pretty picture of the stock. Importantly, Inspirisys Solutions's EBIT fell a jaw-dropping 23% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is Inspirisys Solutions's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Inspirisys Solutions actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

We feel some trepidation about Inspirisys Solutions's difficulty EBIT growth rate, but we've got positives to focus on, too. For example, its conversion of EBIT to free cash flow and net debt to EBITDA give us some confidence in its ability to manage its debt. We think that Inspirisys Solutions's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. 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 2 warning signs for Inspirisys Solutions that 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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