NetSol Technologies (NASDAQ:NTWK) Could Easily Take On More Debt

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.' 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. As with many other companies NetSol Technologies, Inc. (NASDAQ:NTWK) makes use of debt. But the more important question is: how much risk is that debt creating?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is NetSol Technologies's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 NetSol Technologies had debt of US$8.74m, up from US$5.81m in one year. However, it does have US$21.3m in cash offsetting this, leading to net cash of US$12.5m.

How Strong Is NetSol Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NetSol Technologies had liabilities of US$20.0m due within 12 months and liabilities of US$599.0k due beyond that. Offsetting these obligations, it had cash of US$21.3m as well as receivables valued at US$19.0m due within 12 months. So it actually has US$19.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that NetSol Technologies' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that NetSol Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for NetSol Technologies

Although NetSol Technologies made a loss at the EBIT level, last year, it was also good to see that it generated US$869k in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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 .

Finally, while the tax-man may adore accounting profits, lenders only accept 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 year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case NetSol Technologies has US$12.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$2.2m, being 249% of its EBIT. So is NetSol Technologies's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for NetSol Technologies (of which 1 makes us a bit uncomfortable!) you should know about.

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.