We Think One Software Technologies (TLV:ONE) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that One Software Technologies Ltd (TLV:ONE) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for One Software Technologies

What Is One Software Technologies's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 One Software Technologies had debt of ₪184.0m, up from ₪167.4m in one year. But on the other hand it also has ₪292.9m in cash, leading to a ₪108.9m net cash position.

How Strong Is One Software Technologies' Balance Sheet?

We can see from the most recent balance sheet that One Software Technologies had liabilities of ₪652.0m falling due within a year, and liabilities of ₪228.7m due beyond that. Offsetting these obligations, it had cash of ₪292.9m as well as receivables valued at ₪535.1m due within 12 months. So its liabilities total ₪52.7m more than the combination of its cash and short-term receivables.

Having regard to One Software Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₪3.11b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, One Software Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that One Software Technologies has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is One Software Technologies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. One Software Technologies 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, One Software Technologies recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

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 ₪108.9m. And it impressed us with free cash flow of ₪237m, being 99% of its EBIT. So we don't think One Software Technologies's use of debt is risky. 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. For instance, we've identified 2 warning signs for One Software Technologies that you should be aware of.

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.

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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. 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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