One Software Technologies (TLV:ONE) Seems To Use Debt Rather Sparingly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that One Software Technologies Ltd (TLV:ONE) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for One Software Technologies

What Is One Software Technologies's Net Debt?

As you can see below, One Software Technologies had ₪242.9m of debt at September 2023, down from ₪304.0m a year prior. However, its balance sheet shows it holds ₪272.5m in cash, so it actually has ₪29.6m net cash.

How Healthy Is One Software Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that One Software Technologies had liabilities of ₪1.02b due within 12 months and liabilities of ₪285.5m due beyond that. On the other hand, it had cash of ₪272.5m and ₪792.6m worth of receivables due within a year. So its liabilities total ₪242.7m more than the combination of its cash and short-term receivables.

Since publicly traded One Software Technologies shares are worth a total of ₪3.77b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, One Software Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that One Software Technologies grew its EBIT at 10% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since One Software Technologies will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While One Software 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. Over the last three years, One Software Technologies actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about One Software Technologies's liabilities, but we can be reassured by the fact it has has net cash of ₪29.6m. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in ₪314m. So we don't think One Software Technologies's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - One Software Technologies has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.