Coforge (NSE:COFORGE) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Coforge Limited (NSE:COFORGE) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Coforge

How Much Debt Does Coforge Carry?

The image below, which you can click on for greater detail, shows that Coforge had debt of ₹7.18b at the end of September 2024, a reduction from ₹9.43b over a year. But on the other hand it also has ₹17.7b in cash, leading to a ₹10.5b net cash position.

How Healthy Is Coforge's Balance Sheet?

According to the last reported balance sheet, Coforge had liabilities of ₹34.1b due within 12 months, and liabilities of ₹7.37b due beyond 12 months. Offsetting these obligations, it had cash of ₹17.7b as well as receivables valued at ₹26.2b due within 12 months. So it can boast ₹2.48b more liquid assets than total liabilities.

Having regard to Coforge's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹601.4b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Coforge boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Coforge has increased its EBIT by 9.8% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Coforge can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Coforge may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Coforge recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Coforge has net cash of ₹10.5b, as well as more liquid assets than liabilities. So is Coforge's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Coforge 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.