Jack Henry & Associates (NASDAQ:JKHY) Seems To Use Debt Quite Sensibly
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. We can see that Jack Henry & Associates, Inc. (NASDAQ:JKHY) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Jack Henry & Associates
How Much Debt Does Jack Henry & Associates Carry?
As you can see below, Jack Henry & Associates had US$35.0m of debt at March 2019, down from US$105.0m a year prior. However, its balance sheet shows it holds US$35.4m in cash, so it actually has US$398.0k net cash.
How Healthy Is Jack Henry & Associates's Balance Sheet?
According to the last reported balance sheet, Jack Henry & Associates had liabilities of US$330.9m due within 12 months, and liabilities of US$246.0m due beyond 12 months. On the other hand, it had cash of US$35.4m and US$226.4m worth of receivables due within a year. So it has liabilities totalling US$315.0m more than its cash and near-term receivables, combined.
Since publicly traded Jack Henry & Associates shares are worth a very impressive total of US$10.9b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Jack Henry & Associates boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Jack Henry & Associates grew its EBIT by 5.4% in the last year, making that debt load look even more manageable. 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 Jack Henry & Associates 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Jack Henry & Associates 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. During the last three years, Jack Henry & Associates produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Jack Henry & Associates has US$398k in net cash. So is Jack Henry & Associates's debt a risk? It doesn't seem so to us. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Jack Henry & Associates insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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. Thank you for reading.
