We Think LTIMindtree (NSE:LTIM) Can Manage Its Debt With Ease

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, LTIMindtree Limited (NSE:LTIM) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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 LTIMindtree

What Is LTIMindtree's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 LTIMindtree had debt of ₹773.0m, up from ₹224.0m in one year. However, it does have ₹32.6b in cash offsetting this, leading to net cash of ₹31.9b.

A Look At LTIMindtree's Liabilities

The latest balance sheet data shows that LTIMindtree had liabilities of ₹28.3b due within a year, and liabilities of ₹8.20b falling due after that. On the other hand, it had cash of ₹32.6b and ₹41.5b worth of receivables due within a year. So it can boast ₹37.6b more liquid assets than total liabilities.

This surplus suggests that LTIMindtree has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that LTIMindtree has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that LTIMindtree grew its EBIT by 20% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if LTIMindtree 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 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 54% 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 ₹31.9b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 20% over the last year. So we don't think LTIMindtree's use of debt is risky. 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 4 warning signs for LTIMindtree you should be aware of, and 2 of them are a bit concerning.

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.