Is NetSol Technologies (NASDAQ:NTWK) Using Debt Sensibly?

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.' 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 NetSol Technologies, Inc. (NASDAQ:NTWK) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for NetSol Technologies

What Is NetSol Technologies's Net Debt?

As you can see below, NetSol Technologies had US$5.79m of debt at March 2023, down from US$9.63m a year prior. But on the other hand it also has US$15.3m in cash, leading to a US$9.47m net cash position.

How Strong Is NetSol Technologies' Balance Sheet?

The latest balance sheet data shows that NetSol Technologies had liabilities of US$17.7m due within a year, and liabilities of US$866.7k falling due after that. Offsetting these obligations, it had cash of US$15.3m as well as receivables valued at US$23.2m due within 12 months. So it actually has US$19.9m more liquid assets than total liabilities.

This surplus strongly suggests that NetSol Technologies has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that NetSol Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since NetSol Technologies will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year NetSol Technologies had a loss before interest and tax, and actually shrunk its revenue by 12%, to US$52m. That's not what we would hope to see.

So How Risky Is NetSol Technologies?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months NetSol Technologies lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$2.4m and booked a US$2.3m accounting loss. Given it only has net cash of US$9.47m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that NetSol Technologies is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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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