Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Net 1 UEPS Technologies, Inc. (NASDAQ:UEPS) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Net 1 UEPS Technologies's Debt?
The image below, which you can click on for greater detail, shows that Net 1 UEPS Technologies had debt of US$11.4m at the end of March 2021, a reduction from US$54.6m over a year. However, it does have US$207.8m in cash offsetting this, leading to net cash of US$196.4m.
A Look At Net 1 UEPS Technologies' Liabilities
Zooming in on the latest balance sheet data, we can see that Net 1 UEPS Technologies had liabilities of US$47.2m due within 12 months and liabilities of US$94.8m due beyond that. Offsetting these obligations, it had cash of US$207.8m as well as receivables valued at US$47.1m due within 12 months. So it can boast US$112.9m more liquid assets than total liabilities.
This surplus strongly suggests that Net 1 UEPS Technologies has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Net 1 UEPS Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Net 1 UEPS Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Net 1 UEPS Technologies made a loss at the EBIT level, and saw its revenue drop to US$128m, which is a fall of 19%. We would much prefer see growth.
So How Risky Is Net 1 UEPS Technologies?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Net 1 UEPS Technologies had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$83m and booked a US$77m accounting loss. But the saving grace is the US$196.4m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Net 1 UEPS Technologies is showing 2 warning signs in our investment analysis , you should know about...
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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