NetSol Technologies (NASDAQ:NTWK) Seems To Use Debt Rather Sparingly
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for NetSol Technologies
What Is NetSol Technologies's Net Debt?
The image below, which you can click on for greater detail, shows that NetSol Technologies had debt of US$10.1m at the end of December 2021, a reduction from US$11.5m over a year. However, it does have US$25.6m in cash offsetting this, leading to net cash of US$15.5m.
How Strong Is NetSol Technologies' Balance Sheet?
The latest balance sheet data shows that NetSol Technologies had liabilities of US$21.0m due within a year, and liabilities of US$439.9k falling due after that. On the other hand, it had cash of US$25.6m and US$26.0m worth of receivables due within a year. So it actually has US$30.1m more liquid assets than total liabilities.
This surplus liquidity suggests that NetSol Technologies' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that NetSol Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, NetSol Technologies grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since NetSol Technologies will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While NetSol Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, NetSol Technologies actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
While it is always sensible to investigate a company's debt, in this case NetSol Technologies has US$15.5m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 154% of that EBIT to free cash flow, bringing in -US$2.0m. At the end of the day we're not concerned about NetSol Technologies's debt. 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 example - NetSol Technologies has 1 warning sign we think you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
