We Think Tech Mahindra (NSE:TECHM) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 ₹20.4b of debt at September 2024, down from ₹26.1b a year prior. But on the other hand it also has ₹62.5b in cash, leading to a ₹42.1b net cash position.

A Look At Tech Mahindra's Liabilities

We can see from the most recent balance sheet that Tech Mahindra had liabilities of ₹121.9b falling due within a year, and liabilities of ₹37.4b due beyond that. Offsetting this, it had ₹62.5b in cash and ₹119.9b in receivables that were due within 12 months. So it actually has ₹23.1b 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 while it's hard to imagine that the ₹1.32t company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Tech Mahindra boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Tech Mahindra grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. During the last three years, Tech Mahindra generated free cash flow amounting to a very robust 100% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tech Mahindra has net cash of ₹42.1b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹52b, being 100% 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. We've identified 1 warning sign with Tech Mahindra , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.