Net 1 UEPS Technologies (NASDAQ:UEPS) Has Debt But No Earnings; Should You Worry?

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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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 Net 1 UEPS Technologies

What Is Net 1 UEPS Technologies's Net Debt?

As you can see below, Net 1 UEPS Technologies had US$14.2m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$198.6m in cash, so it actually has US$184.3m net cash.

How Strong Is Net 1 UEPS Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Net 1 UEPS Technologies had liabilities of US$52.5m due within 12 months and liabilities of US$99.9m due beyond that. On the other hand, it had cash of US$198.6m and US$47.7m worth of receivables due within a year. So it actually has US$93.9m 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). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Net 1 UEPS Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Net 1 UEPS Technologies made a loss at the EBIT level, and saw its revenue drop to US$131m, which is a fall of 9.4%. 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 the fact is that over the last twelve months Net 1 UEPS Technologies lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$63m and booked a US$38m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$184.3m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Net 1 UEPS Technologies (of which 1 is significant!) you should know about.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.