Coforge (NSE:COFORGE) Has A Rock Solid Balance Sheet

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.' 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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Coforge

What Is Coforge's Debt?

The image below, which you can click on for greater detail, shows that Coforge had debt of ₹3.38b at the end of March 2023, a reduction from ₹3.55b over a year. But on the other hand it also has ₹5.79b in cash, leading to a ₹2.41b net cash position.

A Look At Coforge's Liabilities

Zooming in on the latest balance sheet data, we can see that Coforge had liabilities of ₹17.4b due within 12 months and liabilities of ₹7.74b due beyond that. On the other hand, it had cash of ₹5.79b and ₹17.7b worth of receivables due within a year. So it has liabilities totalling ₹1.68b more than its cash and near-term receivables, combined.

Having regard to Coforge's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹286.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Coforge also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Coforge grew its EBIT at 16% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Coforge's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 last three years, Coforge recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Coforge has ₹2.41b in net cash. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in ₹7.9b. So is Coforge's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Coforge .

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.