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. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that NIIT Limited (NSE:NIITLTD) uses debt in its business. But does this debt worry shareholders?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for NIIT
What is NIIT’s net debt?
The image below, which you can click on for more details, shows that NIIT had debt of ₹346.4 million at the end of September 2021, a reduction from ₹502.2 million year on year. However, his balance sheet shows that he holds ₹11.1 billion in cash, so he actually has ₹10.8 billion in net cash.
How strong is NIIT’s balance sheet?
We can see from the most recent balance sheet that NIIT had liabilities of ₹4.87 billion due within a year, and liabilities of ₹146.2 million due beyond. As compensation for these obligations, it had cash of ₹11.1 billion as well as receivables valued at ₹1.78 billion due within 12 months. So he actually has ₹7.86 billion Continued liquid assets than total liabilities.
This short-term liquidity is a sign that NIIT could probably service its debt easily, as its balance sheet is far from stretched. Simply put, the fact that NIIT has more cash than debt is arguably a good indication that it can safely manage its debt.
Even more impressive is the fact that NIIT increased its EBIT by 443% year-over-year. If sustained, this growth will make debt even more manageable in years to come. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether NIIT 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 NIIT has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it’s building (or erodes) this cash balance. . Fortunately for all shareholders, NIIT has actually produced more free cash flow than EBIT over the past three years. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Abstract
While it is always a good idea to investigate a company’s debt, in this case NIIT has ₹10.8 billion in net cash and a decent looking balance sheet. And it impressed us with free cash flow of ₹2.6 billion, or 118% of its EBIT. We therefore do not believe that NIIT’s use of debt is risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 4 warning signs for NIIT you should know.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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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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