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We Think Cognizant Technology Solutions (NASDAQ:CTSH) Can Manage Its Debt With Ease

Simply Wall St

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Cognizant Technology Solutions Corporation (NASDAQ:CTSH) makes use of debt. 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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Cognizant Technology Solutions

What Is Cognizant Technology Solutions's Net Debt?

As you can see below, Cognizant Technology Solutions had US$746.0m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. But on the other hand it also has US$3.00b in cash, leading to a US$2.26b net cash position.

NasdaqGS:CTSH Historical Debt, October 20th 2019

How Healthy Is Cognizant Technology Solutions's Balance Sheet?

The latest balance sheet data shows that Cognizant Technology Solutions had liabilities of US$2.82b due within a year, and liabilities of US$2.14b falling due after that. Offsetting this, it had US$3.00b in cash and US$3.74b in receivables that were due within 12 months. So it can boast US$1.78b more liquid assets than total liabilities.

This short term liquidity is a sign that Cognizant Technology Solutions could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Cognizant Technology Solutions has more cash than debt is arguably a good indication that it can manage its debt safely.

Cognizant Technology Solutions's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Cognizant Technology Solutions can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Cognizant Technology Solutions 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. Over the most recent three years, Cognizant Technology Solutions recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Cognizant Technology Solutions has US$2.26b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$2.0b, being 77% of its EBIT. So we don't think Cognizant Technology Solutions's use of debt is risky. We'd be very excited to see if Cognizant Technology Solutions 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.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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.