Inspirisys Solutions (NSE:INSPIRISYS) Is Carrying A Fair Bit Of 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Inspirisys Solutions

What Is Inspirisys Solutions's Net Debt?

As you can see below, at the end of March 2022, Inspirisys Solutions had ₹1.05b of debt, up from ₹918.8m a year ago. Click the image for more detail. On the flip side, it has ₹218.3m in cash leading to net debt of about ₹829.7m.

How Strong Is Inspirisys Solutions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Inspirisys Solutions had liabilities of ₹1.85b due within 12 months and liabilities of ₹136.5m due beyond that. On the other hand, it had cash of ₹218.3m and ₹647.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.12b.

While this might seem like a lot, it is not so bad since Inspirisys Solutions has a market capitalization of ₹2.33b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Inspirisys 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, Inspirisys Solutions made a loss at the EBIT level, and saw its revenue drop to ₹3.4b, which is a fall of 15%. We would much prefer see growth.

Caveat Emptor

While Inspirisys Solutions's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹16m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹140m of cash over the last year. So suffice it to say we consider the stock very 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. For example Inspirisys Solutions has 3 warning signs (and 1 which can't be ignored) we think you should know about.

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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