NetSol Technologies (NASDAQ:NTWK) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, NetSol Technologies, Inc. (NASDAQ:NTWK) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for NetSol Technologies

How Much Debt Does NetSol Technologies Carry?

As you can see below, at the end of March 2021, NetSol Technologies had US$13.1m of debt, up from US$8.53m a year ago. Click the image for more detail. But it also has US$30.6m in cash to offset that, meaning it has US$17.5m net cash.

A Look At NetSol Technologies' Liabilities

We can see from the most recent balance sheet that NetSol Technologies had liabilities of US$25.6m falling due within a year, and liabilities of US$1.67m due beyond that. Offsetting these obligations, it had cash of US$30.6m as well as receivables valued at US$22.1m due within 12 months. So it actually has US$25.4m 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. Succinctly put, NetSol Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that NetSol Technologies grew its EBIT by 225% over twelve months. That boost will make it even easier to pay down debt going forward. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that NetSol Technologies has net cash of US$17.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$11m, being 237% of its EBIT. At the end of the day we're not concerned about NetSol Technologies's debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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