eClerx Services (NSE:ECLERX) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, eClerx Services Limited (NSE:ECLERX) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 eClerx Services

How Much Debt Does eClerx Services Carry?

As you can see below, at the end of September 2021, eClerx Services had ₹1.76b of debt, up from ₹1.57b a year ago. Click the image for more detail. But on the other hand it also has ₹8.98b in cash, leading to a ₹7.22b net cash position.

How Healthy Is eClerx Services' Balance Sheet?

According to the last reported balance sheet, eClerx Services had liabilities of ₹2.58b due within 12 months, and liabilities of ₹2.19b due beyond 12 months. On the other hand, it had cash of ₹8.98b and ₹2.63b worth of receivables due within a year. So it actually has ₹6.84b 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!

On top of that, eClerx Services grew its EBIT by 81% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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. While eClerx Services has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, eClerx Services recorded free cash flow worth a fulsome 85% 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 investigate a company's debt, in this case eClerx Services has ₹7.22b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹3.8b, being 85% of its EBIT. So is eClerx Services's debt a risk? It doesn't seem so to us. We'd be very excited to see if eClerx Services insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.