We Think Hudson Global (NASDAQ:HSON) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Hudson Global, Inc. (NASDAQ:HSON) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Hudson Global

What Is Hudson Global's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Hudson Global had US$1.87m of debt, an increase on none, over one year. But on the other hand it also has US$25.8m in cash, leading to a US$24.0m net cash position.

How Strong Is Hudson Global's Balance Sheet?

The latest balance sheet data shows that Hudson Global had liabilities of US$25.6m due within a year, and liabilities of US$923.0k falling due after that. On the other hand, it had cash of US$25.8m and US$31.6m worth of receivables due within a year. So it actually has US$31.0m more liquid assets than total liabilities.

This surplus liquidity suggests that Hudson Global's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Hudson Global has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Hudson Global turned things around in the last 12 months, delivering and EBIT of US$12m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hudson Global can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hudson Global 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 most recent year, Hudson Global recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hudson Global has US$24.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$8.8m, being 76% of its EBIT. So is Hudson Global'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. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Hudson Global , and understanding them should be part of your investment process.

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. 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.