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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Globant S.A. (NYSE:GLOB) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Globant's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Globant had US$78.6m of debt, an increase on US$56.5m, over one year. But on the other hand it also has US$388.1m in cash, leading to a US$309.4m net cash position.
A Look At Globant's Liabilities
According to the last reported balance sheet, Globant had liabilities of US$178.8m due within 12 months, and liabilities of US$155.1m due beyond 12 months. Offsetting this, it had US$388.1m in cash and US$217.1m in receivables that were due within 12 months. So it can boast US$271.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Globant could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Globant boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Globant saw its EBIT drop by 2.2% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
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. Looking at the most recent three years, Globant recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
While we empathize with investors who find debt concerning, you should keep in mind that Globant has net cash of US$309.4m, as well as more liquid assets than liabilities. So we don't have any problem with Globant's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Globant that you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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