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

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 is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 ₹3.49b of debt at September 2024, down from ₹3.76b a year prior. However, it does have ₹9.88b in cash offsetting this, leading to net cash of ₹6.39b.

A Look At KPIT Technologies' Liabilities

According to the last reported balance sheet, KPIT Technologies had liabilities of ₹17.2b due within 12 months, and liabilities of ₹3.63b due beyond 12 months. Offsetting these obligations, it had cash of ₹9.88b as well as receivables valued at ₹10.0b due within 12 months. So it has liabilities totalling ₹966.8m 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 ₹363.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, KPIT Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that KPIT Technologies has boosted its EBIT by 32%, 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'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. 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 puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that KPIT Technologies has ₹6.39b in net cash. And it impressed us with free cash flow of ₹9.9b, being 95% of its EBIT. So is KPIT Technologies's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with KPIT Technologies .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.