Is Cognizant Technology Solutions (NASDAQ:CTSH) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Cognizant Technology Solutions Corporation (NASDAQ:CTSH) does use debt in its business. But the more important question is: how much risk is that debt creating?

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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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

What Is Cognizant Technology Solutions's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Cognizant Technology Solutions had debt of US$908.0m, up from US$639.0m in one year. But it also has US$2.24b in cash to offset that, meaning it has US$1.34b net cash.

A Look At Cognizant Technology Solutions' Liabilities

We can see from the most recent balance sheet that Cognizant Technology Solutions had liabilities of US$3.59b falling due within a year, and liabilities of US$1.97b due beyond that. Offsetting this, it had US$2.24b in cash and US$4.06b in receivables that were due within 12 months. So it can boast US$744.0m more liquid assets than total liabilities.

Having regard to Cognizant Technology Solutions' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$39.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Cognizant Technology Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Cognizant Technology Solutions

Fortunately, Cognizant Technology Solutions grew its EBIT by 3.1% in the last year, making that debt load look even more manageable. 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 Cognizant Technology Solutions 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Cognizant Technology Solutions 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. During the last three years, Cognizant Technology Solutions produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Cognizant Technology Solutions has net cash of US$1.34b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$1.8b, being 68% of its EBIT. So we don't think Cognizant Technology Solutions's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Cognizant Technology Solutions insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.