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Does WNS (Holdings) (NYSE:WNS) Have A Healthy Balance Sheet?

Simply Wall St

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.' 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. As with many other companies WNS (Holdings) Limited (NYSE:WNS) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for WNS (Holdings)

How Much Debt Does WNS (Holdings) Carry?

As you can see below, WNS (Holdings) had US$61.5m of debt at June 2019, down from US$89.2m a year prior. But it also has US$142.4m in cash to offset that, meaning it has US$81.0m net cash.

NYSE:WNS Historical Debt, August 28th 2019
NYSE:WNS Historical Debt, August 28th 2019

How Strong Is WNS (Holdings)'s Balance Sheet?

The latest balance sheet data shows that WNS (Holdings) had liabilities of US$188.7m due within a year, and liabilities of US$240.5m falling due after that. Offsetting this, it had US$142.4m in cash and US$142.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$143.8m.

Of course, WNS (Holdings) has a market capitalization of US$3.01b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, WNS (Holdings) also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that WNS (Holdings) has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. 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 WNS (Holdings)'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. WNS (Holdings) 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. Over the last three years, WNS (Holdings) actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about WNS (Holdings)'s liabilities, but we can be reassured by the fact it has has net cash of US$81m. The cherry on top was that in converted 117% of that EBIT to free cash flow, bringing in US$153m. So is WNS (Holdings)'s debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of WNS (Holdings)'s earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.