Is Tata Elxsi (NSE:TATAELXSI) Using Too Much Debt?

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. We can see that Tata Elxsi Limited (NSE:TATAELXSI) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tata Elxsi

What Is Tata Elxsi's Debt?

As you can see below, at the end of March 2022, Tata Elxsi had ₹1.39b of debt, up from ₹732.1m a year ago. Click the image for more detail. But it also has ₹9.56b in cash to offset that, meaning it has ₹8.18b net cash.

How Strong Is Tata Elxsi's Balance Sheet?

The latest balance sheet data shows that Tata Elxsi had liabilities of ₹4.10b due within a year, and liabilities of ₹1.58b falling due after that. Offsetting these obligations, it had cash of ₹9.56b as well as receivables valued at ₹7.03b due within 12 months. So it can boast ₹10.9b more liquid assets than total liabilities.

This state of affairs indicates that Tata Elxsi's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹550.0b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Tata Elxsi boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Tata Elxsi grew its EBIT by 49% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tata Elxsi 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. 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. During the last three years, Tata Elxsi produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. 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 ₹8.18b, as well as more liquid assets than liabilities. And we liked the look of last year's 49% year-on-year EBIT growth. So is Tata Elxsi'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Tata Elxsi has 1 warning sign we think you should be aware of.

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.