Tech Mahindra (NSE:TECHM) Has A Rock Solid Balance Sheet

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. Importantly, Tech Mahindra Limited (NSE:TECHM) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Tech Mahindra

What Is Tech Mahindra's Debt?

As you can see below, Tech Mahindra had ₹26.2b of debt at March 2022, down from ₹29.0b a year prior. However, its balance sheet shows it holds ₹82.9b in cash, so it actually has ₹56.7b net cash.

How Strong Is Tech Mahindra's Balance Sheet?

According to the last reported balance sheet, Tech Mahindra had liabilities of ₹125.0b due within 12 months, and liabilities of ₹49.8b due beyond 12 months. Offsetting these obligations, it had cash of ₹82.9b as well as receivables valued at ₹133.1b due within 12 months. So it actually has ₹41.2b 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. Succinctly put, Tech Mahindra boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Tech Mahindra grew its EBIT by 5.6% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 96% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tech Mahindra has ₹56.7b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in ₹43b. So we don't think Tech Mahindra's use of debt is risky. 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. We've identified 1 warning sign with Tech Mahindra , and understanding them should be part of your investment process.

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.