Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, NetSol Technologies, Inc. (NASDAQ:NTWK) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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.
How Much Debt Does NetSol Technologies Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 NetSol Technologies had US$11.5m of debt, an increase on US$9.14m, over one year. However, it does have US$32.0m in cash offsetting this, leading to net cash of US$20.5m.
How Strong Is NetSol Technologies' Balance Sheet?
We can see from the most recent balance sheet that NetSol Technologies had liabilities of US$21.7m falling due within a year, and liabilities of US$2.52m due beyond that. Offsetting this, it had US$32.0m in cash and US$18.6m in receivables that were due within 12 months. So it can boast US$26.4m more liquid assets than total liabilities.
This luscious liquidity implies that NetSol Technologies' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, NetSol Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that NetSol Technologies's load is not too heavy, because its EBIT was down 42% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since NetSol 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While NetSol 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. Happily for any shareholders, NetSol Technologies actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While we empathize with investors who find debt concerning, you should keep in mind that NetSol Technologies has net cash of US$20.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$11m, being 249% of its EBIT. So we don't think NetSol Technologies's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for NetSol Technologies that you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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