Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, FDC Limited (NSE:FDC) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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 FDC's Net Debt?
The image below, which you can click on for greater detail, shows that FDC had debt of ₹4.90m at the end of March 2019, a reduction from ₹33.2m over a year. However, its balance sheet shows it holds ₹4.27b in cash, so it actually has ₹4.27b net cash.
How Healthy Is FDC's Balance Sheet?
The latest balance sheet data shows that FDC had liabilities of ₹1.79b due within a year, and liabilities of ₹155.9m falling due after that. On the other hand, it had cash of ₹4.27b and ₹934.8m worth of receivables due within a year. So it actually has ₹3.26b more liquid assets than total liabilities.
This short term liquidity is a sign that FDC could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, FDC boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, FDC grew its EBIT by 2.8% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is FDC'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 company can only pay off debt with cold hard cash, not accounting profits. While FDC has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, FDC recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
While we empathize with investors who find debt concerning, you should keep in mind that FDC has net cash of ₹4.27b, as well as more liquid assets than liabilities. So is FDC's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in FDC, you may well want to click here to check an interactive graph of its earnings per share history.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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