Is 3i Infotech (NSE:3IINFOLTD) Using Debt In A Risky Way?

Warren Buffett famously said, '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, 3i Infotech Limited (NSE:3IINFOLTD) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for 3i Infotech

What Is 3i Infotech's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 3i Infotech had debt of ₹418.5m, up from ₹380.9m in one year. But it also has ₹545.1m in cash to offset that, meaning it has ₹126.6m net cash.

A Look At 3i Infotech's Liabilities

According to the last reported balance sheet, 3i Infotech had liabilities of ₹3.18b due within 12 months, and liabilities of ₹520.9m due beyond 12 months. On the other hand, it had cash of ₹545.1m and ₹1.66b worth of receivables due within a year. So it has liabilities totalling ₹1.50b more than its cash and near-term receivables, combined.

3i Infotech has a market capitalization of ₹5.40b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, 3i Infotech also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since 3i Infotech will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year 3i Infotech wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to ₹8.2b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is 3i Infotech?

Although 3i Infotech had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₹597m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 example, we've discovered 2 warning signs for 3i Infotech (1 is a bit concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.