These 4 Measures Indicate That LTIMindtree (NSE:LTIM) Is Using Debt Safely

Warren Buffett famously said, '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. Importantly, LTIMindtree Limited (NSE:LTIM) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for LTIMindtree

What Is LTIMindtree's Debt?

As you can see below, at the end of March 2023, LTIMindtree had ₹1.25b of debt, up from ₹519.0m a year ago. Click the image for more detail. However, it does have ₹76.7b in cash offsetting this, leading to net cash of ₹75.5b.

How Strong Is LTIMindtree's Balance Sheet?

The latest balance sheet data shows that LTIMindtree had liabilities of ₹54.8b due within a year, and liabilities of ₹14.1b falling due after that. Offsetting this, it had ₹76.7b in cash and ₹72.2b in receivables that were due within 12 months. So it actually has ₹80.0b 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. Simply put, the fact that LTIMindtree has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, LTIMindtree grew its EBIT by 99% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, LTIMindtree's free cash flow amounted to 48% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that LTIMindtree has net cash of ₹75.5b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 99% over the last year. So is LTIMindtree'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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for LTIMindtree (of which 2 are a bit concerning!) you should know about.

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.