Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Mostly, Dixon Technologies (India) Limited (NSE: DIXON) is in debt. But should shareholders be worried about its use of debt?
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for Dixon Technologies (India)
What is the net debt of Dixon Technologies (India)?
As you can see below, at the end of March 2021, Dixon Technologies (India) had a debt of 1.47 billion yen, up from 866.7 million yen a year ago. Click on the image for more details. But he also has 1.76 billion yen in cash to make up for that, which means he has 292.6 million yen in net cash.
How strong is Dixon Technologies (India) balance sheet?
Zooming in on the latest balance sheet data, we can see that Dixon Technologies (India) had 18.7 billion yen liabilities due within 12 months and 2.38 billion yen liabilities beyond. In compensation for these obligations, he had cash of 1.76 billion yen as well as receivables valued at 10.9 billion yen maturing within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by 8.41 yen.
Considering that Dixon Technologies (India) has a market capitalization of 259.2 billion yen, it is hard to believe that these liabilities pose a significant threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. Despite its notable liabilities, Dixon Technologies (India) has a net cash flow, so it is fair to say that it does not have a heavy debt load!
Another good sign, Dixon Technologies (India) was able to increase its EBIT by 27% in twelve months, thus facilitating the repayment of the debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Dixon Technologies (India) can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. Dixon Technologies (India) may have net cash on the balance sheet, but it’s always interesting to look at the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence the both his need for, and his ability to manage debt. In the last three years, Dixon Technologies (India) has posted free cash flow of 8.5% of its EBIT, which is really quite low. For us, the conversion to cash that elicits a bit of paranoia is the ability to extinguish debt.
We could understand if investors are concerned about the liabilities of Dixon Technologies (India), but we can be reassured that it has a net cash position of 292.6M. And we appreciated the appearance of the 27% year-over-year EBIT growth from last year. We are therefore not concerned with the use of debt by Dixon Technologies (India). When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 2 warning signs for Dixon Technologies (India) (1 doesn’t suit us very well!) Which you should be aware of before investing here.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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