HCL Technologies (NSE:HCLTECH) Could Easily Take On More Debt

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.' 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. We note that HCL Technologies Limited (NSE:HCLTECH) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. 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.

View our latest analysis for HCL Technologies

What Is HCL Technologies's Debt?

The image below, which you can click on for greater detail, shows that HCL Technologies had debt of US$339.0m at the end of September 2023, a reduction from US$547.0m over a year. But it also has US$2.70b in cash to offset that, meaning it has US$2.36b net cash.

How Strong Is HCL Technologies' Balance Sheet?

The latest balance sheet data shows that HCL Technologies had liabilities of US$2.49b due within a year, and liabilities of US$869.0m falling due after that. On the other hand, it had cash of US$2.70b and US$3.10b worth of receivables due within a year. So it can boast US$2.43b more liquid assets than total liabilities.

This surplus suggests that HCL Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that HCL Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that HCL Technologies has increased its EBIT by 8.6% 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 it is future earnings, more than anything, that will determine HCL Technologies'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 company can only pay off debt with cold hard cash, not accounting profits. HCL Technologies 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, HCL Technologies generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd 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 HCL Technologies has US$2.36b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$2.7b, being 96% of its EBIT. So is HCL Technologies'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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with HCL Technologies .

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.