Is LTIMindtree (NSE:LTIM) A Risky Investment?

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 can see that LTIMindtree Limited (NSE:LTIM) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for LTIMindtree

What Is LTIMindtree's Debt?

The image below, which you can click on for greater detail, shows that LTIMindtree had debt of ₹407.0m at the end of June 2024, a reduction from ₹1.29b over a year. But it also has ₹91.9b in cash to offset that, meaning it has ₹91.5b net cash.

How Strong Is LTIMindtree's Balance Sheet?

According to the last reported balance sheet, LTIMindtree had liabilities of ₹55.2b due within 12 months, and liabilities of ₹20.2b due beyond 12 months. Offsetting these obligations, it had cash of ₹91.9b as well as receivables valued at ₹68.6b due within 12 months. So it actually has ₹85.1b more liquid assets than total liabilities.

This short term liquidity is a sign that LTIMindtree could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, LTIMindtree boasts net cash, so it's fair to say it does not have a heavy debt load!

LTIMindtree's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine LTIMindtree's ability to maintain a healthy balance sheet going forward. 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 LTIMindtree 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, LTIMindtree produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that LTIMindtree has net cash of ₹91.5b, as well as more liquid assets than liabilities. So is LTIMindtree'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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with LTIMindtree , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.