Is Subex (NSE:SUBEXLTD) Weighed On By Its Debt Load?

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.' 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. As with many other companies Subex Limited (NSE:SUBEXLTD) makes use of debt. But should shareholders be worried about its use of debt?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Subex's Debt?

The image below, which you can click on for greater detail, shows that Subex had debt of ₹245.1m at the end of September 2024, a reduction from ₹321.6m over a year. But on the other hand it also has ₹850.7m in cash, leading to a ₹605.6m net cash position.

How Healthy Is Subex's Balance Sheet?

We can see from the most recent balance sheet that Subex had liabilities of ₹1.05b falling due within a year, and liabilities of ₹877.7m due beyond that. On the other hand, it had cash of ₹850.7m and ₹1.03b worth of receivables due within a year. So its liabilities total ₹53.9m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Subex's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹7.19b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Subex boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Subex 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.

Check out our latest analysis for Subex

In the last year Subex wasn't profitable at an EBIT level, but managed to grow its revenue by 9.4%, to ₹3.0b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Subex?

While Subex lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₹39m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Be aware that Subex is showing 1 warning sign in our investment analysis , you should know about...

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.