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. 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 should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does ExlService Holdings Carry?
As you can see below, at the end of June 2019, ExlService Holdings had US$252.3m of debt, up from US$68.1m a year ago. Click the image for more detail. But it also has US$253.0m in cash to offset that, meaning it has US$752.0k net cash.
How Healthy Is ExlService Holdings's Balance Sheet?
We can see from the most recent balance sheet that ExlService Holdings had liabilities of US$168.2m falling due within a year, and liabilities of US$327.9m due beyond that. Offsetting this, it had US$253.0m in cash and US$197.7m in receivables that were due within 12 months. So its liabilities total US$45.4m more than the combination of its cash and short-term receivables.
Since publicly traded ExlService Holdings shares are worth a total of US$2.25b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, ExlService Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that ExlService Holdings has increased its EBIT by 9.1% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ExlService Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, ExlService Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While it is always sensible to look at a company's total liabilities, it is very reassuring that ExlService Holdings has US$752.0k in net cash. And it impressed us with free cash flow of US$83m, being 102% of its EBIT. 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.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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