Does KPIT Technologies (NSE:KPITTECH) Have A Healthy Balance Sheet?

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 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. Importantly, KPIT Technologies Limited (NSE:KPITTECH) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View 1 warning sign we detected for KPIT Technologies

What Is KPIT Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2019 KPIT Technologies had ₹565.6m of debt, an increase on ₹1.3k, over one year. However, it does have ₹3.50b in cash offsetting this, leading to net cash of ₹2.93b.

How Healthy Is KPIT Technologies's Balance Sheet?

According to the last reported balance sheet, KPIT Technologies had liabilities of ₹4.38b due within 12 months, and liabilities of ₹1.55b due beyond 12 months. Offsetting these obligations, it had cash of ₹3.50b as well as receivables valued at ₹5.57b due within 12 months. So it actually has ₹3.13b more liquid assets than total liabilities.

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

Better yet, KPIT Technologies grew its EBIT by 361% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 KPIT 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. KPIT 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 two years, KPIT Technologies actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that KPIT Technologies has net cash of ₹2.93b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹2.9b, being 172% of its EBIT. So we don't think KPIT Technologies's use of debt is risky. 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. For example, we've discovered 1 warning sign for KPIT Technologies which any shareholder or potential investor should be aware of.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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