These 4 Measures Indicate That Mphasis (NSE:MPHASIS) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Mphasis Limited (NSE:MPHASIS) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Mphasis

How Much Debt Does Mphasis Carry?

As you can see below, at the end of June 2024, Mphasis had ₹14.9b of debt, up from ₹2.91b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹42.3b in cash, so it actually has ₹27.3b net cash.

A Look At Mphasis' Liabilities

Zooming in on the latest balance sheet data, we can see that Mphasis had liabilities of ₹41.7b due within 12 months and liabilities of ₹10.8b due beyond that. On the other hand, it had cash of ₹42.3b and ₹24.2b worth of receivables due within a year. So it can boast ₹14.0b more liquid assets than total liabilities.

This surplus suggests that Mphasis has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Mphasis boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Mphasis has seen its EBIT plunge 11% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Mphasis can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Mphasis 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. During the last three years, Mphasis generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Mphasis has ₹27.3b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹23b, being 87% of its EBIT. So is Mphasis's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Mphasis you should know about.

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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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.