Does Tata Elxsi (NSE:TATAELXSI) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Tata Elxsi Limited (NSE:TATAELXSI) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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, 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Tata Elxsi

What Is Tata Elxsi's Debt?

The image below, which you can click on for greater detail, shows that Tata Elxsi had debt of ₹2.06b at the end of September 2024, a reduction from ₹2.37b over a year. But on the other hand it also has ₹13.2b in cash, leading to a ₹11.1b net cash position.

A Look At Tata Elxsi's Liabilities

We can see from the most recent balance sheet that Tata Elxsi had liabilities of ₹4.82b falling due within a year, and liabilities of ₹2.16b due beyond that. Offsetting these obligations, it had cash of ₹13.2b as well as receivables valued at ₹9.88b due within 12 months. So it actually has ₹16.1b more liquid assets than total liabilities.

This surplus suggests that Tata Elxsi has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tata Elxsi boasts net cash, so it's fair to say it does not have a heavy debt load!

Tata Elxsi'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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Tata Elxsi'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Tata Elxsi 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 most recent three years, Tata Elxsi recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tata Elxsi has net cash of ₹11.1b, as well as more liquid assets than liabilities. So we don't think Tata Elxsi's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Tata Elxsi, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.