Howard Marks put it right when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk that concerns me … and every investor I practice. know worries. It is natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Like many other companies Tech Mahindra Limited (NSE: TECHM) uses debt. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debt and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest review for Tech Mahindra
What is Tech Mahindra’s debt?
The image below, which you can click for more details, shows Tech Mahindra owed â¹ 16.6 billion in debt at the end of March 2021, a reduction of â¹ 24.7 billion on a year. However, his balance sheet shows that he holds â¹ 158.3 billion in cash, so he actually has net cash of â¹ 141.6 billion.
How healthy is Tech Mahindra’s track record?
Zooming in on the latest balance sheet data, we can see that Tech Mahindra had â¹ 102.8 billion in liabilities owed within 12 months and â¹ 41.6 billion in liabilities owed beyond. In return, he had â¹ 158.3 billion in cash and â¹ 64.7 billion in receivables due within 12 months. He can therefore boast of having â¹ 78.6 billion in liquid assets more than total Liabilities.
This surplus suggests that Tech Mahindra has a prudent balance sheet, and could likely eliminate its debt without too much difficulty. Put simply, the fact that Tech Mahindra has more cash than debt is arguably a good indication that it can safely manage its debt.
Also positive, Tech Mahindra increased its EBIT by 25% last year, which should make it easier to pay down debt going forward. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Tech Mahindra can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts‘ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debt with profits on paper; he needs cash. While Tech Mahindra has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building ( or erode) that money. balanced. Over the past three years, Tech Mahindra has generated free cash flow of 97% of its very robust EBIT, more than expected. This positions it well to pay off debt if it is desirable.
While we sympathize with investors who find debt worrying, you should keep in mind that Tech Mahindra has net cash of â¹ 141.6 billion, as well as more liquid assets than liabilities. And it impressed us with free cash flow of â¹ 74 billion, or 97% of its EBIT. So we don’t think Tech Mahindra’s use of debt is risky. 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 Tech Mahindra which you should be aware of before investing here.
If, after all of this, you’re more interested in a fast-growing company with a rock-solid balance sheet, then take a quick look at our list of net cash growth stocks.
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