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

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.' 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. We can see that 3i Infotech Limited (NSE:3IINFOLTD) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for 3i Infotech

What Is 3i Infotech's Debt?

The image below, which you can click on for greater detail, shows that 3i Infotech had debt of ₹1.19b at the end of March 2022, a reduction from ₹5.50b over a year. But it also has ₹1.36b in cash to offset that, meaning it has ₹176.1m net cash.

A Look At 3i Infotech's Liabilities

According to the last reported balance sheet, 3i Infotech had liabilities of ₹1.33b due within 12 months, and liabilities of ₹1.23b due beyond 12 months. Offsetting these obligations, it had cash of ₹1.36b as well as receivables valued at ₹937.1m due within 12 months. So its liabilities total ₹267.6m more than the combination of its cash and short-term receivables.

Of course, 3i Infotech has a market capitalization of ₹7.69b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, 3i Infotech boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is 3i Infotech'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.

Over 12 months, 3i Infotech reported revenue of ₹7.0b, which is a gain of 8.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is 3i Infotech?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that 3i Infotech had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₹598m of cash and made a loss of ₹511m. Given it only has net cash of ₹176.1m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.