Globant (NYSE:GLOB) Has A Pretty Healthy Balance Sheet

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. Importantly, Globant S.A. (NYSE:GLOB) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Globant

What Is Globant's Debt?

As you can see below, at the end of September 2023, Globant had US$53.5m of debt, up from US$8.05m a year ago. Click the image for more detail. However, it does have US$219.3m in cash offsetting this, leading to net cash of US$165.9m.

How Strong Is Globant's Balance Sheet?

We can see from the most recent balance sheet that Globant had liabilities of US$481.0m falling due within a year, and liabilities of US$161.6m due beyond that. Offsetting these obligations, it had cash of US$219.3m as well as receivables valued at US$590.5m due within 12 months. So it actually has US$167.3m more liquid assets than total liabilities.

Having regard to Globant's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$9.57b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Globant has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Globant has increased its EBIT by 3.6% over twelve months, which should ease any concerns about debt repayment. 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 Globant'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Globant 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 most recent three years, Globant recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Globant has net cash of US$165.9m, as well as more liquid assets than liabilities. So we don't think Globant's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Globant, you may well want to click here to check an interactive graph of its earnings per share history.

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.