Tech Mahindra (NSE:TECHM) Could Easily Take On More Debt

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. As with many other companies Tech Mahindra Limited (NSE:TECHM) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tech Mahindra

What Is Tech Mahindra's Net Debt?

The image below, which you can click on for greater detail, shows that Tech Mahindra had debt of ₹26.1b at the end of September 2021, a reduction from ₹28.9b over a year. But it also has ₹113.6b in cash to offset that, meaning it has ₹87.5b net cash.

How Strong Is Tech Mahindra's Balance Sheet?

The latest balance sheet data shows that Tech Mahindra had liabilities of ₹114.7b due within a year, and liabilities of ₹38.9b falling due after that. On the other hand, it had cash of ₹113.6b and ₹65.0b worth of receivables due within a year. So it can boast ₹25.0b more liquid assets than total liabilities.

Having regard to Tech Mahindra's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹1.35t company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Tech Mahindra boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Tech Mahindra has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Tech Mahindra's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Tech Mahindra 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. Happily for any shareholders, Tech Mahindra actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Tech Mahindra has ₹87.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹60b, being 102% of its EBIT. So is Tech Mahindra'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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Tech Mahindra 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.