Does Wipro (NSE: WIPRO) have a healthy balance sheet?
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that Wipro Limited (NSE: WIPRO) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
Why is debt risky?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Wipro
What is Wipro’s debt?
The image below, which you can click on for more details, shows that as of December 2021, Wipro had a debt of ₹133.9 billion, up from ₹73.5 billion in a year. But he also has ₹342.6 billion in cash to offset this, meaning he has a net cash of ₹208.6 billion.
A Look at Wipro’s Responsibilities
Zooming in on the latest balance sheet data, we can see that Wipro had liabilities of ₹251.1 billion due within 12 months and liabilities of ₹111.9 billion due beyond. As compensation for these obligations, it had cash of ₹342.6 billion as well as receivables valued at ₹189.9 billion due within 12 months. So he actually has ₹169.4 billion Continued liquid assets than total liabilities.
This short-term liquidity is a sign that Wipro could probably service its debt easily, as its balance sheet is far from stretched. Simply put, the fact that Wipro has more cash than debt is arguably a good indication that it can safely manage its debt.
Also positive, Wipro has grown its EBIT by 21% over the past year, which should make it easier to pay down debt in the future. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Wipro can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Wipro may have net cash on the balance sheet, but it’s always interesting to look at how well the business converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its need and its ability. to manage debt. Over the past three years, Wipro has generated free cash flow of a very strong 85% of EBIT, more than we expected. This puts him in a very strong position to pay off the debt.
While it’s always a good idea to investigate a company’s debt, in this case Wipro has ₹208.6 billion in net cash and a decent balance sheet. The icing on the cake was that he converted 85% of that EBIT into free cash flow, bringing in ₹83 billion. We therefore do not believe that Wipro’s use of debt is risky. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 2 warning signs for Wipro of which you should be aware.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.