Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Wipro Limited (NSE:WIPRO) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Wipro
How Much Debt Does Wipro Carry?
As you can see below, Wipro had ₹150.1b of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₹400.5b in cash, leading to a ₹250.4b net cash position.
A Look At Wipro's Liabilities
According to the last reported balance sheet, Wipro had liabilities of ₹267.8b due within 12 months, and liabilities of ₹126.3b due beyond 12 months. Offsetting this, it had ₹400.5b in cash and ₹222.5b in receivables that were due within 12 months. So it actually has ₹228.9b 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. 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 Wipro 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Wipro 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, Wipro generated free cash flow amounting to a very robust 86% 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 Wipro has net cash of ₹250.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹116b, being 86% of its EBIT. So we don't think Wipro's use of debt is risky. Another factor that would give us confidence in Wipro would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
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.
About NSEI:WIPRO
Wipro
Operates as an information technology (IT), consulting, and business process services company worldwide.
Excellent balance sheet established dividend payer.
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