Does Inspirisys Solutions (NSE: INSPIRISYS) have a healthy track record?
David Iben put it well when he said, âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Inspirisys Solutions Limited (NSE: INSPIRISYS) uses debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for Inspirisys Solutions
What is the debt of Inspirisys Solutions?
The image below, which you can click for more details, shows that Inspirisys Solutions had a debt of 359.5 million yen at the end of March 2021, a reduction from 1.32 billion yen on a year. However, it also had 357.8M in cash, so its net debt is 1.70M.
How strong is Inspirisys Solutions’ balance sheet?
We can see from the most recent balance sheet that Inspirisys Solutions had liabilities of 2.17 billion yen due within one year and liabilities of 150.3 million yen beyond. On the other hand, it had cash of 357.8 million and 937.6 million in receivables due within one year. Thus, its liabilities exceed the sum of its cash and its (short-term) receivables by 1.03b.
While that might sound like a lot, it’s not that bad as Inspirisys Solutions has a market capitalization of 2.40 billion yen, and could therefore likely strengthen its balance sheet by raising capital if needed. However, it is always worth taking a close look at your ability to repay debts. But in any case, Inspirisys Solutions has virtually no net debt, so it’s fair to say that it doesn’t have a lot of debt!
We use two main ratios to tell us about leverage versus earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Inspirisys Solutions’ debt of only 0.0097 times EBITDA is clearly modest. But strangely, EBIT was only 1.1 times the interest expense, which suggests that this may make the stock look too pretty. It is important to note that Inspirisys Solutions’ EBIT has fallen 23% over the past twelve months. If this earnings trend continues, paying off debt will be about as easy as driving cats on a roller coaster. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the results of Inspirisys Solutions that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Inspirisys Solutions has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
Our point of view
We feel some apprehension about Inspirisys Solutions’ difficult EBIT growth rate, but we also have some bright spots to focus on. For example, its conversion from EBIT to free cash flow and from net debt to EBITDA gives us some confidence in its ability to manage its debt. We think Inspirisys Solutions’ debt makes it a bit risky, after considering the aforementioned data points together. Not all risks are bad, as they can increase stock returns if they are profitable, but this risk of leverage is worth keeping in mind. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 2 warning signs for Inspirisys Solutions that you need to be aware of.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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