David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. 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. We can see that Hinduja Global Solutions Limited (NSE:HGS) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hinduja Global Solutions

How Much Debt Does Hinduja Global Solutions Carry?

The image below, which you can click on for greater detail, shows that at September 2019 Hinduja Global Solutions had debt of ₹4.70b, up from ₹4.11b in one year. But it also has ₹6.46b in cash to offset that, meaning it has ₹1.76b net cash.

How Strong Is Hinduja Global Solutions's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hinduja Global Solutions had liabilities of ₹9.53b due within 12 months and liabilities of ₹12.2b due beyond that. Offsetting these obligations, it had cash of ₹6.46b as well as receivables valued at ₹10.2b due within 12 months. So its liabilities total ₹5.08b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Hinduja Global Solutions is worth ₹12.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Hinduja Global Solutions also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Hinduja Global Solutions has boosted its EBIT by 65%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hinduja Global Solutions 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hinduja Global Solutions 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. During the last three years, Hinduja Global Solutions produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Hinduja Global Solutions's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹1.76b. And it impressed us with its EBIT growth of 65% over the last year. So is Hinduja Global Solutions's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Hinduja Global Solutions, you may well want to click here to check an interactive graph of its earnings per share history.

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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.