eClerx Services (NSE:ECLERX) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that eClerx Services Limited (NSE:ECLERX) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for eClerx Services

What Is eClerx Services's Net Debt?

As you can see below, at the end of March 2024, eClerx Services had ₹2.66b of debt, up from ₹1.94b a year ago. Click the image for more detail. But on the other hand it also has ₹10.8b in cash, leading to a ₹8.19b net cash position.

How Healthy Is eClerx Services' Balance Sheet?

We can see from the most recent balance sheet that eClerx Services had liabilities of ₹3.77b falling due within a year, and liabilities of ₹3.03b due beyond that. Offsetting this, it had ₹10.8b in cash and ₹4.97b in receivables that were due within 12 months. So it can boast ₹9.02b more liquid assets than total liabilities.

This surplus suggests that eClerx Services has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that eClerx Services has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, eClerx Services grew its EBIT by 2.6% 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 future earnings, more than anything, that will determine eClerx Services's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. eClerx Services may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, eClerx Services produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that eClerx Services has net cash of ₹8.19b, as well as more liquid assets than liabilities. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in ₹4.6b. So we don't think eClerx Services's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in eClerx Services, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.