Tata Elxsi (NSE:TATAELXSI) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, '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. Importantly, Tata Elxsi Limited (NSE:TATAELXSI) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Tata Elxsi

How Much Debt Does Tata Elxsi Carry?

As you can see below, at the end of September 2021, Tata Elxsi had ₹1.01b of debt, up from ₹540.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹8.80b in cash, so it actually has ₹7.79b net cash.

How Healthy Is Tata Elxsi's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tata Elxsi had liabilities of ₹2.98b due within 12 months and liabilities of ₹1.27b due beyond that. Offsetting these obligations, it had cash of ₹8.80b as well as receivables valued at ₹4.15b due within 12 months. So it actually has ₹8.70b more liquid assets than total liabilities.

Having regard to Tata Elxsi's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹464.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Tata Elxsi has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Tata Elxsi has boosted its EBIT by 58%, thus reducing the spectre of future debt repayments. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Tata Elxsi 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. During the last three years, Tata Elxsi produced sturdy free cash flow equating to 74% 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 it is always sensible to investigate a company's debt, in this case Tata Elxsi has ₹7.79b in net cash and a decent-looking balance sheet. And we liked the look of last year's 58% 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Tata Elxsi that you should be aware of before investing here.

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.