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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. Importantly, NetSol Technologies, Inc. (NASDAQ:NTWK) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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, at the end of June 2021, NetSol Technologies had US$11.9m of debt, up from US$10.2m a year ago. Click the image for more detail. But it also has US$33.7m in cash to offset that, meaning it has US$21.8m net cash.
A Look At NetSol Technologies' Liabilities
According to the last reported balance sheet, NetSol Technologies had liabilities of US$23.5m due within 12 months, and liabilities of US$1.26m due beyond 12 months. Offsetting these obligations, it had cash of US$33.7m as well as receivables valued at US$19.0m due within 12 months. So it can boast US$28.0m more liquid assets than total liabilities.
This surplus strongly suggests that NetSol Technologies has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, NetSol Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, NetSol Technologies grew its EBIT by 154% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is NetSol Technologies's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, NetSol Technologies actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While we empathize with investors who find debt concerning, you should keep in mind that NetSol Technologies has net cash of US$21.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$13m, being 170% of its EBIT. At the end of the day we're not concerned about NetSol Technologies's debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that NetSol Technologies is showing 2 warning signs in our investment analysis , you should know about...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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.
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