We Think eClerx Services (NSE:ECLERX) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that eClerx Services Limited (NSE:ECLERX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for eClerx Services

What Is eClerx Services's Debt?

As you can see below, at the end of September 2024, eClerx Services had ₹2.90b of debt, up from ₹2.15b a year ago. Click the image for more detail. But on the other hand it also has ₹8.36b in cash, leading to a ₹5.46b net cash position.

A Look At eClerx Services' Liabilities

We can see from the most recent balance sheet that eClerx Services had liabilities of ₹3.21b falling due within a year, and liabilities of ₹3.33b due beyond that. On the other hand, it had cash of ₹8.36b and ₹7.12b worth of receivables due within a year. So it can boast ₹8.93b 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. Succinctly put, eClerx Services boasts net cash, so it's fair to say it does not have a heavy debt load!

eClerx Services's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if eClerx Services can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While eClerx Services 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. Over the most recent three years, eClerx Services recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case eClerx Services has ₹5.46b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in ₹4.4b. So is eClerx Services'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 eClerx Services, 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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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.