Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, NetSol Technologies, Inc. (NASDAQ:NTWK) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 NetSol Technologies's Debt?
As you can see below, NetSol Technologies had US$7.71m of debt at March 2019, down from US$9.40m a year prior. However, it does have US$17.0m in cash offsetting this, leading to net cash of US$9.30m.
How Healthy Is NetSol Technologies's Balance Sheet?
According to the last reported balance sheet, NetSol Technologies had liabilities of US$21.3m due within 12 months, and liabilities of US$716.6k due beyond 12 months. Offsetting these obligations, it had cash of US$17.0m as well as receivables valued at US$36.6m due within 12 months. So it actually has US$31.5m more liquid assets than total liabilities.
This surplus liquidity suggests that NetSol Technologies's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, it seems its balance sheet is as strong as a black-belt karate master. Succinctly put, NetSol Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!
Although NetSol Technologies made a loss at the EBIT level, last year, it was also good to see that it generated US$7.0m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine NetSol Technologies'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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. NetSol Technologies 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. Happily for any shareholders, NetSol Technologies actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While we empathize with investors who find debt concerning, you should keep in mind that NetSol Technologies has net cash of US$9.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 133% of that EBIT to free cash flow, bringing in US$9.3m. So is NetSol Technologies's debt a risk? It doesn't seem so to us. We'd be very excited to see if NetSol Technologies insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
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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