Is Wipro (NSE:WIPRO) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Wipro Limited (NSE:WIPRO) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Wipro

What Is Wipro's Net Debt?

As you can see below, at the end of December 2022, Wipro had ₹158.4b of debt, up from ₹133.9b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹378.4b in cash, so it actually has ₹220.0b net cash.

How Healthy Is Wipro's Balance Sheet?

The latest balance sheet data shows that Wipro had liabilities of ₹285.2b due within a year, and liabilities of ₹124.7b falling due after that. Offsetting these obligations, it had cash of ₹378.4b as well as receivables valued at ₹219.3b due within 12 months. So it actually has ₹187.8b 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.

While Wipro doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Wipro generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Wipro has ₹220.0b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹101b, being 81% of its EBIT. So is Wipro's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 2 warning signs we've spotted with Wipro .

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.