Inspirisys Solutions (NSE:INSPIRISYS) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Inspirisys Solutions Limited (NSE:INSPIRISYS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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.

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 ₹1.09b of debt, up from ₹419.9m a year ago. Click the image for more detail. However, it does have ₹218.3m in cash offsetting this, leading to net debt of about ₹872.9m.

A Look At Inspirisys Solutions' Liabilities

According to the last reported balance sheet, Inspirisys Solutions had liabilities of ₹1.85b due within 12 months, and liabilities of ₹136.5m due beyond 12 months. On the other hand, it had cash of ₹218.3m and ₹845.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹924.1m.

This deficit isn't so bad because Inspirisys Solutions is worth ₹2.34b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Inspirisys Solutions made a loss at the EBIT level, and saw its revenue drop to ₹3.3b, which is a fall of 23%. To be frank that doesn't bode well.

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 ₹69m. 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. Another cause for caution is that is bled ₹140m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Inspirisys Solutions that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.