Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that NetSol Technologies, Inc. (NASDAQ:NTWK) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for NetSol Technologies
What Is NetSol Technologies’s Net Debt?
As you can see below, at the end of December 2019, NetSol Technologies had US$9.14m of debt, up from US$7.29m a year ago. Click the image for more detail. But it also has US$22.1m in cash to offset that, meaning it has US$12.9m net cash.
How Healthy Is NetSol Technologies’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that NetSol Technologies had liabilities of US$21.8m due within 12 months and liabilities of US$2.38m due beyond that. On the other hand, it had cash of US$22.1m and US$30.8m worth of receivables due within a year. So it can boast US$28.8m more liquid assets than total liabilities.
This surplus liquidity suggests that NetSol Technologies’s balance sheet could take a hit just as well as Homer Simpson’s head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that NetSol Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.
In fact NetSol Technologies’s saving grace is its low debt levels, because its EBIT has tanked 57% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if NetSol Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. While NetSol Technologies 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, NetSol Technologies actually produced more free cash flow than EBIT over the last two years. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.
While we empathize with investors who find debt concerning, you should keep in mind that NetSol Technologies has net cash of US$12.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$3.5m, being 192% of its EBIT. So is NetSol Technologies’s debt a risk? It doesn’t seem so to us. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we’ve spotted 4 warning signs for NetSol Technologies you should know about.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
If you spot an error that warrants correction, please contact the editor at [email protected] 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.
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. Thank you for reading.