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

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.' 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. As with many other companies TBO Tek Limited (NSE:TBOTEK) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is TBO Tek's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 TBO Tek had ₹2.10b of debt, an increase on ₹29.3m, over one year. But on the other hand it also has ₹13.7b in cash, leading to a ₹11.6b net cash position.

How Strong Is TBO Tek's Balance Sheet?

The latest balance sheet data shows that TBO Tek had liabilities of ₹45.7b due within a year, and liabilities of ₹2.46b falling due after that. Offsetting this, it had ₹13.7b in cash and ₹37.7b in receivables that were due within 12 months. So it can boast ₹3.31b more liquid assets than total liabilities.

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

See our latest analysis for TBO Tek

Also good is that TBO Tek grew its EBIT at 20% over the last year, further increasing its ability to manage 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 TBO Tek 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, TBO Tek actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that TBO Tek has net cash of ₹11.6b, as well as more liquid assets than liabilities. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in ₹4.7b. So we don't think TBO Tek's use of debt is risky. 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.