KPIT Technologies (NSE:KPITTECH) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that KPIT Technologies Limited (NSE:KPITTECH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for KPIT Technologies

How Much Debt Does KPIT Technologies Carry?

As you can see below, KPIT Technologies had ₹2.27b of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₹10.0b in cash, leading to a ₹7.73b net cash position.

How Strong Is KPIT Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that KPIT Technologies had liabilities of ₹7.08b due within 12 months and liabilities of ₹3.03b due beyond that. On the other hand, it had cash of ₹10.0b and ₹4.71b worth of receivables due within a year. So it actually has ₹4.61b 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. Succinctly put, 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 67%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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.

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. 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

While it is always sensible to investigate a company's debt, in this case KPIT Technologies has ₹7.73b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹4.1b, being 178% of its EBIT. So is KPIT Technologies's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for KPIT Technologies you should know about.

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.