Is Net 1 UEPS Technologies (NASDAQ:UEPS) Using Debt In A Risky Way?

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 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. Importantly, Net 1 UEPS Technologies, Inc. (NASDAQ:UEPS) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Net 1 UEPS Technologies

What Is Net 1 UEPS Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that Net 1 UEPS Technologies had US$6.73m of debt in September 2020, down from US$93.6m, one year before. But on the other hand it also has US$209.2m in cash, leading to a US$202.5m net cash position.

How Strong Is Net 1 UEPS Technologies's Balance Sheet?

We can see from the most recent balance sheet that Net 1 UEPS Technologies had liabilities of US$44.4m falling due within a year, and liabilities of US$90.2m due beyond that. Offsetting this, it had US$209.2m in cash and US$48.8m in receivables that were due within 12 months. So it actually has US$123.4m more liquid assets than total liabilities.

This luscious liquidity implies that Net 1 UEPS Technologies's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Net 1 UEPS Technologies 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.

Over 12 months, Net 1 UEPS Technologies reported revenue of US$140m, which is a gain of 9.1%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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$61m and booked a US$117m accounting loss. But the saving grace is the US$202.5m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Net 1 UEPS Technologies I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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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