TBO Tek (NSE:TBOTEK) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, TBO Tek Limited (NSE:TBOTEK) does carry debt. But the real question is whether this debt is making the company risky.

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. 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, 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.

See our latest analysis for TBO Tek

What Is TBO Tek's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 TBO Tek had ₹2.10b of debt, an increase on ₹63.6m, over one year. But on the other hand it also has ₹7.51b in cash, leading to a ₹5.41b net cash position.

How Healthy Is TBO Tek's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TBO Tek had liabilities of ₹40.6b due within 12 months and liabilities of ₹2.56b due beyond that. On the other hand, it had cash of ₹7.51b and ₹33.7b worth of receivables due within a year. So it has liabilities totalling ₹1.88b more than its cash and near-term receivables, combined.

Having regard to TBO Tek's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹167.2b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, TBO Tek boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that TBO Tek has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine TBO Tek'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. TBO Tek 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. Happily for any shareholders, TBO Tek actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that TBO Tek has ₹5.41b in net cash. The cherry on top was that in converted 121% of that EBIT to free cash flow, bringing in ₹1.9b. So is TBO Tek's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of TBO Tek's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.