Tata Elxsi (NSE:TATAELXSI) Could Easily Take On More 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.' 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. As with many other companies Tata Elxsi Limited (NSE:TATAELXSI) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tata Elxsi

How Much Debt Does Tata Elxsi Carry?

The image below, which you can click on for greater detail, shows that at March 2021 Tata Elxsi had debt of ₹732.1m, up from ₹582.7m in one year. However, its balance sheet shows it holds ₹8.53b in cash, so it actually has ₹7.80b net cash.

How Healthy Is Tata Elxsi's Balance Sheet?

We can see from the most recent balance sheet that Tata Elxsi had liabilities of ₹2.64b falling due within a year, and liabilities of ₹1.00b due beyond that. Offsetting these obligations, it had cash of ₹8.53b as well as receivables valued at ₹5.14b due within 12 months. So it can boast ₹10.0b 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!

On top of that, Tata Elxsi grew its EBIT by 66% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Tata Elxsi's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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 72% 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 ₹7.80b, as well as more liquid assets than liabilities. And we liked the look of last year's 66% year-on-year EBIT growth. So is Tata Elxsi's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Tata Elxsi that you should be aware of.

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.
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