Is Net 1 UEPS Technologies (NASDAQ:UEPS) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Net 1 UEPS Technologies

What Is Net 1 UEPS Technologies's Net Debt?

As you can see below, at the end of September 2021, Net 1 UEPS Technologies had US$51.6m of debt, up from US$6.73m a year ago. Click the image for more detail. However, it does have US$188.5m in cash offsetting this, leading to net cash of US$136.9m.

How Strong Is Net 1 UEPS Technologies' Balance Sheet?

The latest balance sheet data shows that Net 1 UEPS Technologies had liabilities of US$87.7m due within a year, and liabilities of US$99.3m falling due after that. Offsetting these obligations, it had cash of US$188.5m as well as receivables valued at US$48.3m due within 12 months. So it actually has US$49.7m more liquid assets than total liabilities.

This surplus suggests that Net 1 UEPS Technologies is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. 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 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Net 1 UEPS Technologies had a loss before interest and tax, and actually shrunk its revenue by 2.3%, to US$130m. That's not what we would hope to see.

So How Risky Is Net 1 UEPS Technologies?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Net 1 UEPS Technologies had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$41m of cash and made a loss of US$22m. But the saving grace is the US$136.9m 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Net 1 UEPS Technologies , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.