We Think Xpro India (NSE:XPROINDIA) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Xpro India Limited (NSE:XPROINDIA) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Xpro India

What Is Xpro India's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Xpro India had debt of ₹701.5m, up from ₹288.5m in one year. But it also has ₹2.71b in cash to offset that, meaning it has ₹2.01b net cash.

A Look At Xpro India's Liabilities

According to the last reported balance sheet, Xpro India had liabilities of ₹907.1m due within 12 months, and liabilities of ₹989.6m due beyond 12 months. Offsetting this, it had ₹2.71b in cash and ₹679.1m in receivables that were due within 12 months. So it can boast ₹1.50b more liquid assets than total liabilities.

This surplus suggests that Xpro India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Xpro India has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Xpro India saw its EBIT drop by 8.5% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is Xpro India's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Xpro India 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. Considering the last three years, Xpro India actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Xpro India has net cash of ₹2.01b, as well as more liquid assets than liabilities. So we are not troubled with Xpro India's debt use. 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 3 warning signs for Xpro India (1 can't be ignored) you should be aware of.

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.