We Think Sapiens International (NASDAQ:SPNS) Can Manage Its Debt With Ease
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.' 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. We note that Sapiens International Corporation N.V. (NASDAQ:SPNS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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.
Check out our latest analysis for Sapiens International
What Is Sapiens International's Debt?
The image below, which you can click on for greater detail, shows that Sapiens International had debt of US$68.7m at the end of June 2019, a reduction from US$78.4m over a year. But it also has US$77.3m in cash to offset that, meaning it has US$8.62m net cash.
How Strong Is Sapiens International's Balance Sheet?
The latest balance sheet data shows that Sapiens International had liabilities of US$96.7m due within a year, and liabilities of US$130.2m falling due after that. Offsetting these obligations, it had cash of US$77.3m as well as receivables valued at US$66.4m due within 12 months. So it has liabilities totalling US$83.2m more than its cash and near-term receivables, combined.
Since publicly traded Sapiens International shares are worth a total of US$888.0m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Sapiens International boasts net cash, so it's fair to say it does not have a heavy debt load!
Also positive, Sapiens International grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sapiens International'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Sapiens International 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, Sapiens International produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Summing up
We could understand if investors are concerned about Sapiens International's liabilities, but we can be reassured by the fact it has has net cash of US$8.6m. And we liked the look of last year's 25% year-on-year EBIT growth. So we don't think Sapiens International's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Sapiens International, you may well want to click here to check an interactive graph of its earnings per share history.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.
