Inspirisys Solutions (NSE:INSPIRISYS) has good debt
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies Inspirisys Solutions Limited (NSE:INSPIRISYS) uses debt. But the real question is whether this debt makes the business risky.
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Inspirisys Solutions
What is Inspirisys Solutions’ net debt?
As you can see below, at the end of March 2022, Inspirisys Solutions had ₹1.05 billion in debt, up from ₹918.8 million a year ago. Click on the image for more details. On the other hand, it has ₹218.3 million in cash, resulting in a net debt of around ₹829.7 million.
How strong is Inspirisys Solutions’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Inspirisys Solutions had liabilities of ₹1.85 billion due within 12 months and liabilities of ₹136.5 million due beyond. On the other hand, it had cash of ₹218.3 million and ₹647.1 million in receivables due within one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of ₹1.12 billion.
While that might sound like a lot, it’s not that bad since Inspirisys Solutions has a market capitalization of ₹2.33 billion, and so it could probably bolster its balance sheet by raising capital if needed. But it is clear that it is essential to examine closely whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; because Inspirisys Solutions will need income to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Over 12 months, Inspirisys Solutions recorded a loss in EBIT and saw its revenue fall to ₹3.4 billion, a decline of 15%. We would much rather see growth.
While Inspirisys Solutions’ revenue decline is about as comforting as a wet blanket, its earnings before interest and tax (EBIT) loss is arguably even less appealing. To be precise, the EBIT loss amounted to ₹16 million. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. Quite frankly, we think the track record falls short, although it could improve over time. However, it doesn’t help that he burned through ₹140 million in cash in the last year. So suffice it to say that we consider the stock to be very risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, Inspirisys Solutions has 3 warning signs (and 1 that can’t be ignored) that we think you should know about.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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