ExlService Holdings (NASDAQ:EXLS) Could Easily Take On More Debt

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies ExlService Holdings, Inc. (NASDAQ:EXLS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 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 ExlService Holdings

What Is ExlService Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that ExlService Holdings had US$250.0m in debt in December 2022; about the same as the year before. However, its balance sheet shows it holds US$297.7m in cash, so it actually has US$47.7m net cash.

How Strong Is ExlService Holdings' Balance Sheet?

The latest balance sheet data shows that ExlService Holdings had liabilities of US$277.9m due within a year, and liabilities of US$310.0m falling due after that. Offsetting this, it had US$297.7m in cash and US$275.9m in receivables that were due within 12 months. So its liabilities total US$14.4m more than the combination of its cash and short-term receivables.

Having regard to ExlService Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$5.08b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, ExlService Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, ExlService Holdings grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, ExlService Holdings recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about ExlService Holdings's liabilities, but we can be reassured by the fact it has has net cash of US$47.7m. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in US$121m. So is ExlService Holdings's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for ExlService Holdings that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.