ExlService Holdings (NASDAQ:EXLS) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that ExlService Holdings, Inc. (NASDAQ:EXLS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ExlService Holdings

What Is ExlService Holdings's Debt?

As you can see below, ExlService Holdings had US$200.0m of debt at March 2023, down from US$295.0m a year prior. But on the other hand it also has US$203.8m in cash, leading to a US$3.78m net cash position.

How Healthy Is ExlService Holdings' Balance Sheet?

The latest balance sheet data shows that ExlService Holdings had liabilities of US$280.9m due within a year, and liabilities of US$232.4m falling due after that. On the other hand, it had cash of US$203.8m and US$306.9m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that ExlService Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$5.13b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, ExlService Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, ExlService Holdings grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. 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 ExlService Holdings 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While ExlService Holdings 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, ExlService Holdings generated free cash flow amounting to a very robust 94% 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 look at a company's total liabilities, it is very reassuring that ExlService Holdings has US$3.78m in net cash. And it impressed us with free cash flow of US$168m, being 94% of its EBIT. So is ExlService Holdings's debt a risk? It doesn't seem so to us. We'd be very excited to see if ExlService Holdings insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.