Yahoo Finance WNS (Holdings) (NYSE:WNS) Could Easily Take On More Debt
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that WNS (Holdings) Limited (NYSE:WNS) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for WNS (Holdings)
What Is WNS (Holdings)'s Debt?
You can click the graphic below for the historical numbers, but it shows that WNS (Holdings) had US$16.8m of debt in June 2021, down from US$33.5m, one year before. However, its balance sheet shows it holds US$218.4m in cash, so it actually has US$201.6m net cash.
A Look At WNS (Holdings)'s Liabilities
According to the last reported balance sheet, WNS (Holdings) had liabilities of US$188.1m due within 12 months, and liabilities of US$202.2m due beyond 12 months. Offsetting this, it had US$218.4m in cash and US$173.9m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.
Having regard to WNS (Holdings)'s size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$4.13b company is short on cash, but still worth keeping an eye on the 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.
And we also note warmly that WNS (Holdings) grew its EBIT by 13% last year, making its debt load easier to handle. 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. 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
While it is always sensible to investigate a company's debt, in this case WNS (Holdings) has US$201.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$176m, being 125% of its EBIT. So we don't think WNS (Holdings)'s use of debt is risky. 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.
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.
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.
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