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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 WNS (Holdings) Limited (NYSE:WNS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is WNS (Holdings)'s Debt?
You can click the graphic below for the historical numbers, but it shows that WNS (Holdings) had US$16.7m of debt in March 2021, down from US$33.4m, one year before. However, its balance sheet shows it holds US$309.3m in cash, so it actually has US$292.6m 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$207.5m due within 12 months and liabilities of US$214.5m due beyond that. Offsetting these obligations, it had cash of US$309.3m as well as receivables valued at US$157.3m due within 12 months. So it can boast US$44.6m more liquid assets than total liabilities.
This state of affairs indicates that WNS (Holdings)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$3.61b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, WNS (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, WNS (Holdings) saw its EBIT drop by 7.8% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, WNS (Holdings) actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While we empathize with investors who find debt concerning, you should keep in mind that WNS (Holdings) has net cash of US$292.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in US$181m. 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.
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. 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.
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