We Think Mphasis (NSE:MPHASIS) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Mphasis

What Is Mphasis's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Mphasis had debt of ₹6.60b, up from ₹3.36b in one year. However, it does have ₹27.4b in cash offsetting this, leading to net cash of ₹20.8b.

How Healthy Is Mphasis' Balance Sheet?

According to the last reported balance sheet, Mphasis had liabilities of ₹31.3b due within 12 months, and liabilities of ₹12.7b due beyond 12 months. On the other hand, it had cash of ₹27.4b and ₹24.0b worth of receivables due within a year. So it actually has ₹7.41b more liquid assets than total liabilities.

This state of affairs indicates that Mphasis' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹499.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Mphasis has more cash than debt is arguably a good indication that it can manage its debt safely.

Mphasis's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Mphasis's ability to maintain a healthy balance sheet going forward. 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. 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 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Mphasis has net cash of ₹20.8b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹16b, being 81% of its EBIT. So we don't think Mphasis's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Mphasis is showing 2 warning signs in our investment analysis , you should know about...

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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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.