Is Tech Mahindra (NSE:TECHM) A Risky Investment?

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.' 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 Tech Mahindra Limited (NSE:TECHM) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Tech Mahindra

How Much Debt Does Tech Mahindra Carry?

As you can see below, Tech Mahindra had ₹15.8b of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₹70.4b in cash, leading to a ₹54.6b net cash position.

A Look At Tech Mahindra's Liabilities

The latest balance sheet data shows that Tech Mahindra had liabilities of ₹133.2b due within a year, and liabilities of ₹44.4b falling due after that. On the other hand, it had cash of ₹70.4b and ₹128.8b worth of receivables due within a year. So it actually has ₹21.6b more liquid assets than total liabilities.

This short term liquidity is a sign that Tech Mahindra could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Tech Mahindra has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Tech Mahindra saw its EBIT decline by 7.2% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tech Mahindra 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Tech Mahindra 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, Tech Mahindra generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tech Mahindra has ₹54.6b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹46b, being 90% of its EBIT. So we don't think Tech Mahindra's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Tech Mahindra .

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.