Is 3i Infotech (NSE:3IINFOLTD) Weighed On By Its Debt Load?

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. As with many other companies 3i Infotech Limited (NSE:3IINFOLTD) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for 3i Infotech

What Is 3i Infotech's Net Debt?

As you can see below, 3i Infotech had ₹1.40b of debt at September 2021, down from ₹8.01b a year prior. However, it does have ₹2.67b in cash offsetting this, leading to net cash of ₹1.27b.

How Healthy Is 3i Infotech's Balance Sheet?

We can see from the most recent balance sheet that 3i Infotech had liabilities of ₹1.96b falling due within a year, and liabilities of ₹1.54b due beyond that. On the other hand, it had cash of ₹2.67b and ₹1.37b worth of receivables due within a year. So it actually has ₹541.3m more liquid assets than total liabilities.

This short term liquidity is a sign that 3i Infotech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, 3i Infotech boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is 3i Infotech's earnings that will influence how the balance sheet holds up in the future. 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 had a loss before interest and tax, and actually shrunk its revenue by 38%, to ₹6.5b. To be frank that doesn't bode well.

So How Risky Is 3i Infotech?

While 3i Infotech lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₹2.5b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - 3i Infotech has 3 warning signs we think 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.