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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Tech Mahindra Limited (NSE:TECHM) does carry debt. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

How Much Debt Does Tech Mahindra Carry?

As you can see below, Tech Mahindra had ₹4.71b of debt at March 2025, down from ₹15.3b a year prior. But it also has ₹74.4b in cash to offset that, meaning it has ₹69.6b net cash.

How Healthy Is Tech Mahindra's Balance Sheet?

The latest balance sheet data shows that Tech Mahindra had liabilities of ₹126.7b due within a year, and liabilities of ₹40.3b falling due after that. On the other hand, it had cash of ₹74.4b and ₹115.5b worth of receivables due within a year. So it actually has ₹22.8b more liquid assets than total liabilities.

This state of affairs indicates that Tech Mahindra's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹1.40t company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Tech Mahindra has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Tech Mahindra

On top of that, Tech Mahindra grew its EBIT by 62% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tech Mahindra has ₹69.6b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹52b, being 106% of its EBIT. So is Tech Mahindra's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Tech Mahindra that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.