Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Net 1 UEPS Technologies, Inc. (NASDAQ:UEPS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Net 1 UEPS Technologies's Debt?
The image below, which you can click on for greater detail, shows that Net 1 UEPS Technologies had debt of US$14.8m at the end of June 2020, a reduction from US$85.0m over a year. However, it does have US$217.7m in cash offsetting this, leading to net cash of US$202.9m.
A Look At Net 1 UEPS Technologies's Liabilities
The latest balance sheet data shows that Net 1 UEPS Technologies had liabilities of US$71.3m due within a year, and liabilities of US$92.2m falling due after that. Offsetting these obligations, it had cash of US$217.7m as well as receivables valued at US$58.9m due within 12 months. So it actually has US$113.2m more liquid assets than total liabilities.
This surplus strongly suggests that Net 1 UEPS Technologies has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that Net 1 UEPS 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 Net 1 UEPS Technologies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Net 1 UEPS Technologies made a loss at the EBIT level, and saw its revenue drop to US$151m, which is a fall of 19%. We would much prefer see growth.
So How Risky Is Net 1 UEPS Technologies?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Net 1 UEPS Technologies had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$52.0m of cash and made a loss of US$95.7m. But the saving grace is the US$202.9m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Net 1 UEPS Technologies 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. 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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