Is Wipro (NSE:WIPRO) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Wipro Limited (NSE:WIPRO) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Wipro

What Is Wipro's Net Debt?

As you can see below, at the end of September 2024, Wipro had ₹165.8b of debt, up from ₹156.0b a year ago. Click the image for more detail. But on the other hand it also has ₹511.6b in cash, leading to a ₹345.8b net cash position.

A Look At Wipro's Liabilities

The latest balance sheet data shows that Wipro had liabilities of ₹280.9b due within a year, and liabilities of ₹159.1b falling due after that. Offsetting this, it had ₹511.6b in cash and ₹208.6b in receivables that were due within 12 months. So it actually has ₹280.3b more liquid assets than total liabilities.

This surplus suggests that Wipro has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Wipro has more cash than debt is arguably a good indication that it can manage its debt safely.

Wipro'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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wipro's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Wipro 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, Wipro recorded free cash flow worth a fulsome 97% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Wipro has net cash of ₹345.8b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹171b, being 97% of its EBIT. So we don't think Wipro's use of debt is risky. We'd be very excited to see if Wipro 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.

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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.