Subex (NSE:SUBEXLTD) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Subex Limited (NSE:SUBEXLTD) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Subex

How Much Debt Does Subex Carry?

You can click the graphic below for the historical numbers, but it shows that Subex had ₹257.9m of debt in March 2021, down from ₹486.7m, one year before. However, its balance sheet shows it holds ₹1.43b in cash, so it actually has ₹1.17b net cash.

How Healthy Is Subex's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Subex had liabilities of ₹967.2m due within 12 months and liabilities of ₹813.9m due beyond that. Offsetting these obligations, it had cash of ₹1.43b as well as receivables valued at ₹1.59b due within 12 months. So it actually has ₹1.23b more liquid assets than total liabilities.

This short term liquidity is a sign that Subex could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Subex boasts net cash, so it's fair to say it does not have a heavy debt load!

While Subex doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is Subex's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Subex may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Subex recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Subex has ₹1.17b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹823m, being 98% of its EBIT. So we don't think Subex's use of debt is risky. 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 - Subex has 3 warning signs we think you should be aware of.

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.
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