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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies ExlService Holdings, Inc. (NASDAQ:EXLS) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for ExlService Holdings

How Much Debt Does ExlService Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that ExlService Holdings had US$220.0m of debt in June 2023, down from US$285.0m, one year before. However, its balance sheet shows it holds US$250.1m in cash, so it actually has US$30.1m net cash.

How Healthy Is ExlService Holdings' Balance Sheet?

We can see from the most recent balance sheet that ExlService Holdings had liabilities of US$259.1m falling due within a year, and liabilities of US$269.4m due beyond that. Offsetting this, it had US$250.1m in cash and US$306.2m in receivables that were due within 12 months. So it actually has US$27.7m more liquid assets than 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$4.65b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that ExlService Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that ExlService Holdings has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that ExlService Holdings has net cash of US$30.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 33% over the last year. So we don't think ExlService Holdings'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. For example - ExlService Holdings has 1 warning sign we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.