Is KPIT Technologies (NSE:KPITTECH) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies KPIT Technologies Limited (NSE:KPITTECH) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for KPIT Technologies

What Is KPIT Technologies's Debt?

As you can see below, at the end of March 2023, KPIT Technologies had ₹492.1m of debt, up from ₹25.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹5.88b in cash, so it actually has ₹5.39b net cash.

How Healthy Is KPIT Technologies' Balance Sheet?

According to the last reported balance sheet, KPIT Technologies had liabilities of ₹11.7b due within 12 months, and liabilities of ₹5.69b due beyond 12 months. Offsetting these obligations, it had cash of ₹5.88b as well as receivables valued at ₹7.75b due within 12 months. So its liabilities total ₹3.74b more than the combination of its cash and short-term receivables.

This state of affairs indicates that KPIT Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹239.1b 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!

On top of that, KPIT Technologies grew its EBIT by 54% over the last twelve months, and that growth will make it easier to handle its debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, KPIT Technologies actually produced more free cash flow than EBIT over the last three years. 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 ₹5.39b. And it impressed us with free cash flow of ₹3.3b, being 130% of its EBIT. So we don't think KPIT 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. For example, we've discovered 2 warning signs 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.