These 4 Measures Indicate That Sapiens International (NASDAQ:SPNS) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Sapiens International Corporation N.V. (NASDAQ:SPNS) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

You can click the graphic below for the historical numbers, but it shows that Sapiens International had US$59.3m of debt in June 2023, down from US$79.0m, one year before. But it also has US$179.4m in cash to offset that, meaning it has US$120.1m net cash.

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$140.6m due within 12 months and liabilities of US$93.7m due beyond that. On the other hand, it had cash of US$179.4m and US$103.9m worth of receivables due within a year. So it can boast US$49.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Sapiens International could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Sapiens International has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Sapiens International grew its EBIT by 9.4% in the last year, making that debt load look even more manageable. 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 88% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sapiens International has US$120.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in US$46m. So we don't think Sapiens International's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Sapiens International .

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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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.