Would 3i Infotech (NSE:3IINFOLTD) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, 3i Infotech Limited (NSE:3IINFOLTD) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for 3i Infotech

What Is 3i Infotech's Debt?

You can click the graphic below for the historical numbers, but it shows that 3i Infotech had ₹992.4m of debt in March 2023, down from ₹1.19b, one year before. However, because it has a cash reserve of ₹667.3m, its net debt is less, at about ₹325.1m.

A Look At 3i Infotech's Liabilities

We can see from the most recent balance sheet that 3i Infotech had liabilities of ₹2.63b falling due within a year, and liabilities of ₹663.3m due beyond that. Offsetting these obligations, it had cash of ₹667.3m as well as receivables valued at ₹2.07b due within 12 months. So its liabilities total ₹553.5m more than the combination of its cash and short-term receivables.

Of course, 3i Infotech has a market capitalization of ₹6.75b, 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. 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 6.9%, to ₹7.4b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, 3i Infotech had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹597m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹292m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. Case in point: We've spotted 2 warning signs for 3i Infotech you should be aware of, and 1 of them can't be ignored.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.