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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 Globant S.A. (NYSE:GLOB) does use debt in its business. But should shareholders be worried about its use of debt?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Globant
What Is Globant's Debt?
As you can see below, at the end of March 2022, Globant had US$11.4m of debt, up from US$1.48m a year ago. Click the image for more detail. But on the other hand it also has US$370.1m in cash, leading to a US$358.7m net cash position.
A Look At Globant's Liabilities
According to the last reported balance sheet, Globant had liabilities of US$344.8m due within 12 months, and liabilities of US$168.6m due beyond 12 months. Offsetting this, it had US$370.1m in cash and US$419.5m in receivables that were due within 12 months. So it can boast US$276.1m more liquid assets than total liabilities.
This short term liquidity is a sign that Globant could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Globant boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Globant grew its EBIT by 68% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Globant'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Globant 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. In the last three years, Globant's free cash flow amounted to 43% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.