Larsen & Toubro Infotech (NSE:LTI) could easily take on more debt

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David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Larsen & Toubro Infotech Limited (NSE:LTI) uses debt. But should shareholders worry about its use of debt?

Why is debt risky?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Larsen & Toubro Infotech

What is Larsen & Toubro Infotech’s debt?

As you can see below, at the end of December 2021, Larsen & Toubro Infotech had a debt of ₹309.0 million, compared to ₹176.0 million a year ago. Click on the image for more details. However, he has ₹36.1 billion in cash to offset this, resulting in a net cash of ₹35.8 billion.

NSEI: LTI Debt to Equity History April 13, 2022

How healthy is Larsen & Toubro Infotech’s balance sheet?

We can see from the most recent balance sheet that Larsen & Toubro Infotech had liabilities of ₹27.5 billion due within a year, and liabilities of ₹7.12 billion due beyond that. In return, he had ₹36.1 billion in cash and ₹34.6 billion in receivables due within 12 months. It can therefore boast of having ₹36.1 billion in liquid assets more than total Passives.

This short-term liquidity is a sign that Larsen & Toubro Infotech could probably easily repay its debt, as its balance sheet is far from stretched. Simply put, the fact that Larsen & Toubro Infotech has more cash than debt is arguably a good indication that it can safely manage its debt.

And we also warmly note that Larsen & Toubro Infotech increased its EBIT by 15% last year, which makes it easier to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Larsen & Toubro Infotech can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, while the taxman may love accounting profits, lenders only accept cash. Although Larsen & Toubro Infotech has net cash on its balance sheet, it is still worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it builds (or erodes) this cash balance. Over the past three years, Larsen & Toubro Infotech has produced strong free cash flow equivalent to 71% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.

Summary

While we sympathize with investors who find debt a concern, you should bear in mind that Larsen & Toubro Infotech has a net cash position of ₹35.8 billion, as well as more liquid assets than liabilities . The icing on the cake was that 71% of this EBIT was converted into free cash flow, bringing in ₹14 billion. So is Larsen & Toubro Infotech’s debt a risk? This does not seem to us to be the case. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, Larsen & Toubro Infotech has 4 warning signs (and 1 which is a little worrying) that we think you should know about.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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