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.' 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. Importantly, WNS (Holdings) Limited (NYSE:WNS) does carry debt. But should shareholders be worried about its use of debt?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is WNS (Holdings)'s Net Debt?
You can click the graphic below for the historical numbers, but it shows that WNS (Holdings) had US$8.38m of debt in September 2021, down from US$25.1m, one year before. However, its balance sheet shows it holds US$238.5m in cash, so it actually has US$230.1m net cash.
How Healthy Is WNS (Holdings)'s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that WNS (Holdings) had liabilities of US$194.7m due within 12 months and liabilities of US$200.7m due beyond that. On the other hand, it had cash of US$238.5m and US$182.3m worth of receivables due within a year. So it actually has US$25.4m more liquid assets than total liabilities.
Having regard to WNS (Holdings)'s size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$4.20b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that WNS (Holdings) has more cash than debt is arguably a good indication that it can manage its debt safely.
Fortunately, WNS (Holdings) grew its EBIT by 7.7% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if WNS (Holdings) 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 WNS (Holdings) 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, WNS (Holdings) actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While it is always sensible to investigate a company's debt, in this case WNS (Holdings) has US$230.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in US$166m. So is WNS (Holdings)'s debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in WNS (Holdings), you may well want to click here to check an interactive graph of its earnings per share history.
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.