Is Sapiens International (NASDAQ:SPNS) Using Too Much Debt?

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.' 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 note that Sapiens International Corporation N.V. (NASDAQ:SPNS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Sapiens International

How Much Debt Does Sapiens International Carry?

The image below, which you can click on for greater detail, shows that Sapiens International had debt of US$59.3m at the end of March 2023, a reduction from US$79.0m over a year. But on the other hand it also has US$181.7m in cash, leading to a US$122.4m net cash position.

How Healthy Is Sapiens International's Balance Sheet?

The latest balance sheet data shows that Sapiens International had liabilities of US$149.0m due within a year, and liabilities of US$96.4m falling due after that. Offsetting these obligations, it had cash of US$181.7m as well as receivables valued at US$106.5m due within 12 months. So it can boast US$42.8m 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 12% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sapiens International 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. Over the last three years, Sapiens International recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sapiens International has US$122.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$38m, being 92% of its EBIT. So is Sapiens International's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Sapiens International that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.