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Is One Point One Solutions (NSE:ONEPOINT) Using Debt Sensibly?
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.' 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 can see that One Point One Solutions Limited (NSE:ONEPOINT) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for One Point One Solutions
How Much Debt Does One Point One Solutions Carry?
As you can see below, at the end of March 2021, One Point One Solutions had ₹196.4m of debt, up from ₹134.5m a year ago. Click the image for more detail. However, it does have ₹18.3m in cash offsetting this, leading to net debt of about ₹178.1m.
How Healthy Is One Point One Solutions' Balance Sheet?
According to the last reported balance sheet, One Point One Solutions had liabilities of ₹398.7m due within 12 months, and liabilities of ₹845.1m due beyond 12 months. Offsetting these obligations, it had cash of ₹18.3m as well as receivables valued at ₹267.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹957.7m.
When you consider that this deficiency exceeds the company's ₹679.5m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 One Point One 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, One Point One Solutions made a loss at the EBIT level, and saw its revenue drop to ₹1.0b, which is a fall of 19%. That's not what we would hope to see.
Caveat Emptor
Not only did One Point One Solutions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹188m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₹22m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with One Point One Solutions (at least 3 which are concerning) , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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This article by Simply Wall St is general in nature. 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.
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About NSEI:ONEPOINT
One Point One Solutions
Engages in the customer life cycle management, business process management, and technology servicing activities in India.
Excellent balance sheet with acceptable track record.
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