Is Sapiens International (NASDAQ:SPNS) A Risky Investment?

Warren Buffett famously said, '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, Sapiens International Corporation N.V. (NASDAQ:SPNS) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sapiens International

What Is Sapiens International's Net Debt?

The image below, which you can click on for greater detail, shows that Sapiens International had debt of US$39.6m at the end of June 2024, a reduction from US$59.3m over a year. But on the other hand it also has US$186.4m in cash, leading to a US$146.9m net cash position.

How Strong Is Sapiens International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sapiens International had liabilities of US$142.8m due within 12 months and liabilities of US$65.0m due beyond that. On the other hand, it had cash of US$186.4m and US$122.4m worth of receivables due within a year. So it actually has US$101.0m more liquid assets than total liabilities.

This surplus suggests that Sapiens International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sapiens International boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Sapiens International grew its EBIT by 16% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sapiens International can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sapiens International may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Sapiens International recorded free cash flow worth 74% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sapiens International has US$146.9m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 74% of that EBIT to free cash flow, bringing in US$61m. So we don't think Sapiens International's use of debt is risky. 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 example - Sapiens International has 1 warning sign we think you should be aware of.

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.