We Think L&T Technology Services (NSE:LTTS) Can Manage Its Debt With Ease

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that L&T Technology Services Limited (NSE:LTTS) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 September 2024 L&T Technology Services had ₹6.44b of debt, an increase on ₹5.51b, over one year. However, its balance sheet shows it holds ₹26.7b in cash, so it actually has ₹20.2b net cash.

How Healthy Is L&T Technology Services' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that L&T Technology Services had liabilities of ₹24.1b due within 12 months and liabilities of ₹6.01b due beyond that. On the other hand, it had cash of ₹26.7b and ₹23.1b worth of receivables due within a year. So it actually has ₹19.7b more liquid assets than total liabilities.

This surplus suggests that L&T Technology Services has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, L&T Technology Services boasts net cash, so it's fair to say it does not have a heavy debt load!

L&T Technology 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine L&T Technology Services's ability to maintain a healthy balance sheet going forward. 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 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. During the last three years, L&T Technology Services produced sturdy free cash flow equating to 73% 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 it is always sensible to investigate a company's debt, in this case L&T Technology Services has ₹20.2b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹11b, being 73% of its EBIT. So is L&T Technology Services's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for L&T Technology Services that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.