Is Cognizant Technology Solutions (NASDAQ:CTSH) A Risky Investment?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Cognizant Technology Solutions Corporation (NASDAQ:CTSH) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Cognizant Technology Solutions

How Much Debt Does Cognizant Technology Solutions Carry?

As you can see below, Cognizant Technology Solutions had US$646.0m of debt, at March 2023, 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$2.48b in cash, so it actually has US$1.84b net cash.

NasdaqGS:CTSH Debt to Equity History May 26th 2023

How Strong Is Cognizant Technology Solutions’ Balance Sheet?

We can see from the most recent balance sheet that Cognizant Technology Solutions had liabilities of US$3.32b falling due within a year, and liabilities of US$2.17b due beyond that. On the other hand, it had cash of US$2.48b and US$4.08b worth of receivables due within a year. So it actually has US$1.07b more liquid assets than total liabilities.

This short term liquidity is a sign that Cognizant Technology Solutions could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Cognizant Technology Solutions has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Cognizant Technology Solutions grew its EBIT by 5.1% in the last year, making that debt load look even more manageable. 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 Cognizant Technology Solutions’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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Cognizant Technology Solutions 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. Over the last three years, Cognizant Technology Solutions recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we’d usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company’s debt, in this case Cognizant Technology Solutions has US$1.84b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$2.7b, being 92% of its EBIT. So we don’t think Cognizant Technology Solutions’s use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. Case in point: We’ve spotted 1 warning sign for Cognizant Technology Solutions you should be aware of.

Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.

Valuation is complex, but we’re helping make it simple.

Find out whether Cognizant Technology Solutions is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.

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