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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 HCL Technologies Limited (NSE:HCLTECH) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for HCL Technologies

What Is HCL Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that HCL Technologies had US$269.0m of debt in December 2024, down from US$285.0m, one year before. However, its balance sheet shows it holds US$3.19b in cash, so it actually has US$2.92b net cash.

How Healthy Is HCL Technologies' Balance Sheet?

The latest balance sheet data shows that HCL Technologies had liabilities of US$2.72b due within a year, and liabilities of US$1.14b falling due after that. Offsetting these obligations, it had cash of US$3.19b as well as receivables valued at US$3.16b due within 12 months. So it actually has US$2.50b 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.

Fortunately, HCL Technologies grew its EBIT by 4.6% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if HCL Technologies 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While HCL Technologies 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. During the last three years, HCL Technologies generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that HCL Technologies has net cash of US$2.92b, as well as more liquid assets than liabilities. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in US$2.7b. So is HCL Technologies's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for HCL Technologies that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.