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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Naspers Limited (JSE:NPN) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Naspers's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Naspers had US$5.72b of debt, an increase on US$3.32b, over one year. But on the other hand it also has US$10.3b in cash, leading to a US$4.59b net cash position.
How Healthy Is Naspers' Balance Sheet?
The latest balance sheet data shows that Naspers had liabilities of US$2.83b due within a year, and liabilities of US$6.32b falling due after that. On the other hand, it had cash of US$10.3b and US$702.0m worth of receivables due within a year. So it can boast US$1.87b more liquid assets than total liabilities.
This short term liquidity is a sign that Naspers could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Naspers 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 Naspers'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.
In the last year Naspers wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to US$4.8b. With any luck the company will be able to grow its way to profitability.
So How Risky Is Naspers?
While Naspers lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$3.0b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Keeping in mind its 36% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. For riskier companies like Naspers I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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