NIIT (NSE:NIITLTD) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 NIIT Limited (NSE:NIITLTD) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 NIIT

What Is NIIT's Net Debt?

The image below, which you can click on for greater detail, shows that NIIT had debt of ₹346.4m at the end of September 2021, a reduction from ₹502.2m over a year. However, its balance sheet shows it holds ₹11.1b in cash, so it actually has ₹10.8b net cash.

How Strong Is NIIT's Balance Sheet?

We can see from the most recent balance sheet that NIIT had liabilities of ₹4.87b falling due within a year, and liabilities of ₹146.2m due beyond that. Offsetting these obligations, it had cash of ₹11.1b as well as receivables valued at ₹1.78b due within 12 months. So it actually has ₹7.86b more liquid assets than total liabilities.

This short term liquidity is a sign that NIIT could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that NIIT has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that NIIT grew its EBIT by 443% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 NIIT 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While NIIT 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. Happily for any shareholders, NIIT actually produced more free cash flow than EBIT over the last three years. 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 it is always sensible to investigate a company's debt, in this case NIIT has ₹10.8b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹2.6b, being 118% of its EBIT. So we don't think NIIT's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. 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 NIIT you should know about.

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.