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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, 3i Infotech Limited (NSE:3IINFOTECH) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for 3i Infotech

How Much Debt Does 3i Infotech Carry?

The image below, which you can click on for greater detail, shows that 3i Infotech had debt of ₹5.16b at the end of March 2021, a reduction from ₹8.53b over a year. But on the other hand it also has ₹7.62b in cash, leading to a ₹2.46b net cash position.

How Strong Is 3i Infotech's Balance Sheet?

According to the last reported balance sheet, 3i Infotech had liabilities of ₹1.75b due within 12 months, and liabilities of ₹5.57b due beyond 12 months. Offsetting this, it had ₹7.62b in cash and ₹882.6m in receivables that were due within 12 months. So it actually has ₹1.18b more liquid assets than total liabilities.

This surplus suggests that 3i Infotech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, 3i Infotech made a loss at the EBIT level, and saw its revenue drop to ₹6.3b, which is a fall of 45%. To be frank that doesn't bode well.

So How Risky Is 3i Infotech?

Although 3i Infotech had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₹2.6b. 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. Be aware that 3i Infotech is showing 3 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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