Does L&T Technology Services (NSE:LTTS) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 L&T Technology Services Limited (NSE:LTTS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for L&T Technology Services

What Is L&T Technology Services's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 L&T Technology Services had ₹4.54b of debt, an increase on none, over one year. But on the other hand it also has ₹28.0b in cash, leading to a ₹23.4b net cash position.

A Look At L&T Technology Services' Liabilities

According to the last reported balance sheet, L&T Technology Services had liabilities of ₹15.1b due within 12 months, and liabilities of ₹4.35b due beyond 12 months. Offsetting these obligations, it had cash of ₹28.0b as well as receivables valued at ₹21.5b due within 12 months. So it actually has ₹30.0b more liquid assets than total liabilities.

This short term liquidity is a sign that L&T Technology Services could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that L&T Technology Services has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, L&T Technology Services grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if L&T Technology Services can strengthen its balance sheet over time. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While L&T Technology 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 last three years, L&T Technology Services recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that L&T Technology Services has net cash of ₹23.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹11b, being 84% of its EBIT. So we don't think L&T Technology Services's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - L&T Technology Services has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.