Is HCL Technologies (NSE:HCLTECH) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies HCL Technologies Limited (NSE:HCLTECH) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for HCL Technologies

What Is HCL Technologies's Net Debt?

As you can see below, HCL Technologies had US$270.0m of debt at June 2023, down from US$525.0m a year prior. However, it does have US$2.36b in cash offsetting this, leading to net cash of US$2.09b.

A Look At HCL Technologies' Liabilities

According to the last reported balance sheet, HCL Technologies had liabilities of US$2.44b due within 12 months, and liabilities of US$792.0m due beyond 12 months. Offsetting these obligations, it had cash of US$2.36b as well as receivables valued at US$3.25b due within 12 months. So it can boast US$2.38b more liquid assets than total liabilities.

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

Fortunately, HCL Technologies grew its EBIT by 7.7% 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the last three years, HCL Technologies recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case HCL Technologies has US$2.09b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$2.3b, being 93% of its EBIT. So we don't think HCL Technologies's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with HCL Technologies .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.