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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Globant S.A. (NYSE:GLOB) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
What Is Globant's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2024 Globant had debt of US$127.4m, up from US$348.0k in one year. However, it does have US$180.4m in cash offsetting this, leading to net cash of US$53.0m.
How Strong Is Globant's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Globant had liabilities of US$551.2m due within 12 months and liabilities of US$228.6m due beyond that. Offsetting this, it had US$180.4m in cash and US$668.9m in receivables that were due within 12 months. So it can boast US$69.3m more liquid assets than total liabilities.
Having regard to Globant's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$8.50b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Globant boasts net cash, so it's fair to say it does not have a heavy debt load!
Also good is that Globant grew its EBIT at 10% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Globant 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Globant has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Globant recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Globant has net cash of US$53.0m, as well as more liquid assets than liabilities. So is Globant's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Globant that you should be aware of.
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.
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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.