Tanla Platforms (NSE:TANLA) Could Easily Take On More Debt

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. Importantly, Tanla Platforms Limited (NSE:TANLA) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Tanla Platforms

What Is Tanla Platforms's Net Debt?

As you can see below, at the end of September 2021, Tanla Platforms had ₹376.8m of debt, up from ₹40.9m a year ago. Click the image for more detail. But on the other hand it also has ₹8.46b in cash, leading to a ₹8.08b net cash position.

How Healthy Is Tanla Platforms' Balance Sheet?

The latest balance sheet data shows that Tanla Platforms had liabilities of ₹9.72b due within a year, and liabilities of ₹414.7m falling due after that. On the other hand, it had cash of ₹8.46b and ₹7.81b worth of receivables due within a year. So it can boast ₹6.13b more liquid assets than total liabilities.

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

And we also note warmly that Tanla Platforms grew its EBIT by 19% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Tanla Platforms 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Tanla Platforms may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Tanla Platforms recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Tanla Platforms has ₹8.08b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹7.0b, being 93% of its EBIT. So is Tanla Platforms'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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Tanla Platforms you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.