We Think NetSol Technologies (NASDAQ:NTWK) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 NetSol Technologies, Inc. (NASDAQ:NTWK) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for NetSol Technologies

What Is NetSol Technologies's Debt?

The image below, which you can click on for greater detail, shows that NetSol Technologies had debt of US$10.1m at the end of December 2021, a reduction from US$11.5m over a year. But it also has US$25.6m in cash to offset that, meaning it has US$15.5m net cash.

How Healthy Is NetSol Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NetSol Technologies had liabilities of US$21.0m due within 12 months and liabilities of US$439.9k due beyond that. Offsetting this, it had US$25.6m in cash and US$26.0m in receivables that were due within 12 months. So it actually has US$30.1m more liquid assets than total liabilities.

This surplus liquidity suggests that NetSol Technologies' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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.

On top of that, NetSol Technologies grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is NetSol Technologies's earnings that will influence how the balance sheet holds up in the future. 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 company can only pay off debt with cold hard cash, not accounting profits. 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.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that NetSol Technologies has net cash of US$15.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 154% of that EBIT to free cash flow, bringing in -US$2.0m. At the end of the day we're not concerned about NetSol Technologies's debt. 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. Case in point: We've spotted 2 warning signs for NetSol Technologies you should be aware of.

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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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.