We Think KPIT Technologies (NSE:KPITTECH) Can Manage Its Debt With Ease

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. 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.

When Is Debt A Problem?

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. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for KPIT Technologies

How Much Debt Does KPIT Technologies Carry?

The image below, which you can click on for greater detail, shows that KPIT Technologies had debt of ₹2.10b at the end of September 2021, a reduction from ₹2.45b over a year. However, its balance sheet shows it holds ₹9.22b in cash, so it actually has ₹7.12b net cash.

How Strong Is KPIT Technologies' Balance Sheet?

According to the last reported balance sheet, KPIT Technologies had liabilities of ₹5.93b due within 12 months, and liabilities of ₹2.52b due beyond 12 months. Offsetting these obligations, it had cash of ₹9.22b as well as receivables valued at ₹4.14b due within 12 months. So it actually has ₹4.91b 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.

In addition to that, we're happy to report that KPIT Technologies has boosted its EBIT by 81%, 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.

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. 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 ₹7.12b, as well as more liquid assets than liabilities. The cherry on top was that in converted 207% of that EBIT to free cash flow, bringing in ₹5.3b. 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. Case in point: We've spotted 3 warning signs for KPIT Technologies you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.