Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that Cognizant Technology Solutions Corporation (NASDAQ:CTSH) uses debt in its business. But the more important question is: what risk does this debt create?
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
Check out our latest analysis of Cognizant technology solutions
How much debt does Cognizant Technology Solutions have?
You can click on the chart below for historical numbers, but it shows Cognizant Technology Solutions had US$655.0 million in debt in March 2022, up from US$692.0 million a year prior. However, he has $2.32 billion in cash to offset that, which translates to net cash of $1.66 billion.
How strong is Cognizant Technology Solutions’ balance sheet?
According to the last published balance sheet, Cognizant Technology Solutions had liabilities of US$3.19 billion due within 12 months and liabilities of US$2.28 billion due beyond 12 months. In return, he had $2.32 billion in cash and $4.03 billion in receivables due within 12 months. It can therefore boast of having $888.0 million in cash more than total Passives.
This short-term liquidity is a sign that Cognizant Technology Solutions could probably service its debt easily, as its balance sheet is far from stretched. In short, Cognizant Technology Solutions has clean cash, so it’s fair to say that they don’t have a lot of debt!
As a further benefit, Cognizant Technology Solutions increased its EBIT by 19% over last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when analyzing debt. But future revenues, more than anything, will determine Cognizant Technology Solutions’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a company can only repay its debts with cash, not book profits. Cognizant Technology Solutions may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its ability to manage debt. Over the past three years, Cognizant Technology Solutions has generated free cash flow of 89% of EBIT, more than expected. This positions him well to pay off debt if desired.
Summary
While we sympathize with investors who find debt a concern, you should keep in mind that Cognizant Technology Solutions has net cash of US$1.66 billion, as well as more liquid assets than liabilities. . And it impressed us with free cash flow of $2.3 billion, or 89% of its EBIT. So is Cognizant Technology Solutions’ debt a risk? This does not seem to us to be the case. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 2 warning signs for Cognizant technology solutions you should be aware.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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