Is KPIT Technologies (NSE:KPITTECH) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 KPIT Technologies Limited (NSE:KPITTECH) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for KPIT Technologies

How Much Debt Does KPIT Technologies Carry?

As you can see below, at the end of March 2023, KPIT Technologies had ₹2.87b of debt, up from ₹2.27b a year ago. Click the image for more detail. But it also has ₹5.88b in cash to offset that, meaning it has ₹3.02b net cash.

How Healthy Is KPIT Technologies' Balance Sheet?

We can see from the most recent balance sheet that KPIT Technologies had liabilities of ₹11.7b falling due within a year, and liabilities of ₹5.69b due beyond that. Offsetting these obligations, it had cash of ₹5.88b as well as receivables valued at ₹7.75b due within 12 months. So it has liabilities totalling ₹3.74b more than its cash and near-term receivables, combined.

Having regard to KPIT Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹315.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, KPIT Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that KPIT Technologies has boosted its EBIT by 59%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if KPIT 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While KPIT 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. Over the last three years, KPIT Technologies actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about KPIT Technologies's liabilities, but we can be reassured by the fact it has has net cash of ₹3.02b. And it impressed us with free cash flow of ₹3.3b, being 105% of its EBIT. So is KPIT 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. For example, we've discovered 1 warning sign for KPIT 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.