Stock Analysis

Naspers (JSE:NPN) Is Carrying A Fair Bit Of Debt

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JSE:NPN
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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Naspers Limited (JSE:NPN) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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.

Check out our latest analysis for Naspers

How Much Debt Does Naspers Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Naspers had US$8.09b of debt, an increase on US$3.64b, over one year. However, it does have US$6.45b in cash offsetting this, leading to net debt of about US$1.64b.

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JSE:NPN Debt to Equity History September 23rd 2021

How Healthy Is Naspers' Balance Sheet?

The latest balance sheet data shows that Naspers had liabilities of US$4.31b due within a year, and liabilities of US$8.65b falling due after that. On the other hand, it had cash of US$6.45b and US$813.0m worth of receivables due within a year. So its liabilities total US$5.69b more than the combination of its cash and short-term receivables.

Of course, Naspers has a titanic market capitalization of US$66.2b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Naspers 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.

In the last year Naspers wasn't profitable at an EBIT level, but managed to grow its revenue by 48%, to US$5.9b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Naspers's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at US$1.1b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$67m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Naspers 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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