Is Trident Techlabs (NSE:TECHLABS) 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. Importantly, Trident Techlabs Limited (NSE:TECHLABS) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Trident Techlabs

How Much Debt Does Trident Techlabs Carry?

You can click the graphic below for the historical numbers, but it shows that Trident Techlabs had ₹192.8m of debt in March 2024, down from ₹230.0m, one year before. But it also has ₹231.8m in cash to offset that, meaning it has ₹38.9m net cash.

How Strong Is Trident Techlabs' Balance Sheet?

According to the last reported balance sheet, Trident Techlabs had liabilities of ₹386.1m due within 12 months, and liabilities of ₹136.6m due beyond 12 months. On the other hand, it had cash of ₹231.8m and ₹629.5m worth of receivables due within a year. So it can boast ₹338.5m more liquid assets than total liabilities.

This surplus suggests that Trident Techlabs has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Trident Techlabs has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Trident Techlabs grew its EBIT by 72% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Trident Techlabs will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Trident Techlabs 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, Trident Techlabs burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Trident Techlabs has ₹38.9m in net cash and a decent-looking balance sheet. And we liked the look of last year's 72% year-on-year EBIT growth. So we don't have any problem with Trident Techlabs's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Trident Techlabs has 3 warning signs (and 1 which doesn't sit too well with us) we think 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.