David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We can see that Net 1 UEPS Technologies, Inc. (NASDAQ:UEPS) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.
How Much Debt Does Net 1 UEPS Technologies Carry?
You can click the graphic below for the historical numbers, but it shows that Net 1 UEPS Technologies had US$60.8m of debt in December 2020, down from US$102.3m, one year before. But it also has US$206.3m in cash to offset that, meaning it has US$145.4m net cash.
A Look At Net 1 UEPS Technologies’ Liabilities
Zooming in on the latest balance sheet data, we can see that Net 1 UEPS Technologies had liabilities of US$98.4m due within 12 months and liabilities of US$93.4m due beyond that. Offsetting this, it had US$206.3m in cash and US$46.1m in receivables that were due within 12 months. So it can boast US$60.6m more liquid assets than total liabilities.
This surplus suggests that Net 1 UEPS Technologies is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don’t think it will have any issues with its lenders. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Net 1 UEPS Technologies had a loss before interest and tax, and actually shrunk its revenue by 16%, to US$133m. We would much prefer see growth.
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$80m and booked a US$119m accounting loss. While this does make the company a bit risky, it’s important to remember it has net cash of US$145.4m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. 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.