Does Genpact (NYSE:G) have a healthy track record?

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David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, Genpact Limited (NYSE:G) is in debt. But the more important question is: what risk does this debt create?

What risk does debt carry?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

What is Genpact’s debt?

You can click on the chart below for historical numbers, but it shows Genpact had $1.54 billion in debt in June 2022, up from $1.67 billion a year prior. However, since it has a cash reserve of $464.8 million, its net debt is less, at around $1.08 billion.

NYSE:G Debt to Equity October 18, 2022

A look at Genpact’s responsibilities

According to the last published balance sheet, Genpact had liabilities of $1.09 billion due within 12 months and liabilities of $1.70 billion due beyond 12 months. In return, it had $464.8 million in cash and $1.01 billion in receivables due within 12 months. Thus, its liabilities total $1.31 billion more than the combination of its cash and short-term receivables.

Given that Genpact has a market capitalization of US$8.15 billion, it’s hard to believe that these liabilities pose a big threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Genpact’s net debt/EBITDA ratio of approximately 1.6 suggests only moderate debt utilization. And its towering EBIT of 10.7 times its interest expense means that the debt burden is as light as a peacock feather. Although Genpact doesn’t seem to have gained much on the EBIT line, at least earnings are holding steady for now. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Genpact can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a company can only repay its debts with cold hard cash, not with book profits. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Genpact has generated free cash flow of a very strong 91% of its EBIT, more than we expected. This positions him well to pay off debt if desired.

Our point of view

Genpact’s conversion of EBIT to free cash flow suggests it can manage its debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. And the good news doesn’t end there, because its interesting cover also reinforces this impression! When we consider the range of factors above, it seems that Genpact is quite sensitive with its use of debt. While this carries some risk, it can also improve shareholder returns. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Know that Genpact displays 2 warning signs in our investment analysis you should know…

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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