ExlService Holdings (NASDAQ:EXLS) Seems To Use Debt Rather Sparingly
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that ExlService Holdings, Inc. (NASDAQ:EXLS) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for ExlService Holdings
What Is ExlService Holdings's Debt?
The image below, which you can click on for greater detail, shows that at December 2021 ExlService Holdings had debt of US$260.0m, up from US$227.0m in one year. But on the other hand it also has US$313.9m in cash, leading to a US$53.9m net cash position.
How Healthy Is ExlService Holdings' Balance Sheet?
We can see from the most recent balance sheet that ExlService Holdings had liabilities of US$495.7m falling due within a year, and liabilities of US$94.1m due beyond that. On the other hand, it had cash of US$313.9m and US$214.5m worth of receivables due within a year. So its liabilities total US$61.4m 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 it's very unlikely that the US$4.75b company is short on cash, but still worth keeping an eye on the 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!
In addition to that, we're happy to report that ExlService Holdings has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. 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 actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that ExlService Holdings has US$53.9m in net cash. The cherry on top was that in converted 124% of that EBIT to free cash flow, bringing in US$147m. So we don't think ExlService Holdings's use of debt is risky. 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.
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.
