Is Globant (NYSE:GLOB) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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 A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Globant

How Much Debt Does Globant Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Globant had debt of US$8.05m, up from US$2.63m in one year. However, its balance sheet shows it holds US$369.2m in cash, so it actually has US$361.1m net cash.

How Healthy Is Globant's Balance Sheet?

The latest balance sheet data shows that Globant had liabilities of US$370.7m due within a year, and liabilities of US$152.3m falling due after that. Offsetting these obligations, it had cash of US$369.2m as well as receivables valued at US$487.6m due within 12 months. So it can boast US$333.7m more liquid assets than total liabilities.

This surplus suggests that Globant has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Globant boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Globant grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. 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 Globant 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Globant may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Globant recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Globant has US$361.1m in net cash and a decent-looking balance sheet. And we liked the look of last year's 46% year-on-year EBIT growth. So we don't think Globant's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Globant's earnings per share history for free.

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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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.