Is Globant (NYSE:GLOB) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Globant S.A. (NYSE:GLOB) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Globant

What Is Globant's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2019 Globant had US$51.4m of debt, an increase on none, over one year. But it also has US$82.5m in cash to offset that, meaning it has US$31.1m net cash.

How Strong Is Globant's Balance Sheet?

According to the last reported balance sheet, Globant had liabilities of US$146.2m due within 12 months, and liabilities of US$102.9m due beyond 12 months. Offsetting these obligations, it had cash of US$82.5m as well as receivables valued at US$173.3m due within 12 months. So it actually has US$6.74m more liquid assets than total liabilities.

This state of affairs indicates that Globant's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$2.69b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Globant boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Globant has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Globant can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Globant's free cash flow amounted to 49% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Globant has net cash of US$31.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 23% over the last year. So we don't think Globant's use of debt is risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Globant .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.