eClerx Services (NSE:ECLERX) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, eClerx Services Limited (NSE:ECLERX) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for eClerx Services

How Much Debt Does eClerx Services Carry?

As you can see below, eClerx Services had ₹1.76b of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₹8.42b in cash offsetting this, leading to net cash of ₹6.66b.

How Strong Is eClerx Services' Balance Sheet?

According to the last reported balance sheet, eClerx Services had liabilities of ₹3.49b due within 12 months, and liabilities of ₹2.15b due beyond 12 months. Offsetting these obligations, it had cash of ₹8.42b as well as receivables valued at ₹3.65b due within 12 months. So it can boast ₹6.42b more liquid assets than total liabilities.

This short term liquidity is a sign that eClerx Services could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, eClerx Services boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, eClerx Services grew its EBIT by 8.8% in the last year, making that debt load look even more manageable. 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 eClerx Services's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. eClerx Services 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. During the last three years, eClerx Services produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. 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 eClerx Services has net cash of ₹6.66b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹3.9b, being 75% of its EBIT. So is eClerx Services's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in eClerx Services, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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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.