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Is Lesaka Technologies (NASDAQ:LSAK) Using Debt Sensibly?

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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Lesaka Technologies, Inc. (NASDAQ:LSAK) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Lesaka Technologies

What Is Lesaka Technologies's Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Lesaka Technologies had debt of US$45.7m, up from US$11.4m in one year. However, it does have US$183.7m in cash offsetting this, leading to net cash of US$138.0m.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Lesaka Technologies' Liabilities

We can see from the most recent balance sheet that Lesaka Technologies had liabilities of US$81.3m falling due within a year, and liabilities of US$99.4m due beyond that. On the other hand, it had cash of US$183.7m and US$46.6m worth of receivables due within a year. So it actually has US$49.7m more liquid assets than total liabilities.

It's good to see that Lesaka Technologies has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Lesaka Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Lesaka Technologies's ability to maintain a healthy balance sheet going forward. 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 Lesaka Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to US$135m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Lesaka Technologies?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Lesaka Technologies had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$41m of cash and made a loss of US$27m. While this does make the company a bit risky, it's important to remember it has net cash of US$138.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Lesaka Technologies insider transactions.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.