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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 KPIT Technologies Limited (NSE:KPITTECH) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for KPIT Technologies

What Is KPIT Technologies's Debt?

As you can see below, KPIT Technologies had ₹447.4m of debt at March 2024, down from ₹492.1m a year prior. But on the other hand it also has ₹8.57b in cash, leading to a ₹8.12b net cash position.

A Look At KPIT Technologies' Liabilities

According to the last reported balance sheet, KPIT Technologies had liabilities of ₹15.1b due within 12 months, and liabilities of ₹4.92b due beyond 12 months. Offsetting these obligations, it had cash of ₹8.57b as well as receivables valued at ₹9.56b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.92b.

Having regard to KPIT Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹391.7b company is short on cash, but still worth keeping an eye on the 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 66%, thus reducing the spectre of future debt repayments. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, KPIT Technologies generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that KPIT Technologies has ₹8.12b in net cash. And it impressed us with free cash flow of ₹8.5b, being 95% 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that KPIT Technologies is showing 1 warning sign in our investment analysis , you should know about...

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.