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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. As with many other companies Net 1 UEPS Technologies, Inc. (NASDAQ:UEPS) makes use of debt. But the real question is whether this debt is making the company risky.
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Net 1 UEPS Technologies Carry?
As you can see below, Net 1 UEPS Technologies had US$14.2m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$198.6m in cash, so it actually has US$184.3m net cash.
A Look At Net 1 UEPS Technologies' Liabilities
We can see from the most recent balance sheet that Net 1 UEPS Technologies had liabilities of US$52.5m falling due within a year, and liabilities of US$99.9m due beyond that. Offsetting these obligations, it had cash of US$198.6m as well as receivables valued at US$47.7m due within 12 months. So it actually has US$93.9m 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). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Net 1 UEPS Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Net 1 UEPS Technologies 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.
Over 12 months, Net 1 UEPS Technologies made a loss at the EBIT level, and saw its revenue drop to US$131m, which is a fall of 9.4%. That's not what we would hope to see.
So How Risky Is Net 1 UEPS Technologies?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Net 1 UEPS Technologies had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$63m and booked a US$38m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$184.3m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Net 1 UEPS Technologies (of which 1 is a bit unpleasant!) you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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