Volatility vs. Debt: Understanding Risk in Investing
Investing in the stock market can be both exciting and risky. Some investors believe that volatility is the best way to measure risk, while others argue that debt levels are a crucial factor to consider. Warren Buffett, one of the most successful investors of all time, famously stated that “Volatility is far from synonymous with risk.” So, what does this mean for shareholders of Cognizant Technology Solutions Corporation (NASDAQ: CTSH)? Should they be concerned about the company’s use of debt?
Assessing Cognizant Technology Solutions’ Debt Levels
Debt can be a double-edged sword for companies. On one hand, it can provide necessary capital for growth and investment. On the other hand, if not managed properly, it can lead to financial distress and bankruptcy. Therefore, it is essential to evaluate a company’s debt levels to assess its financial health. When examining Cognizant Technology Solutions’ balance sheet, we find that the company had $647.0 million of debt as of September 2023, which is roughly the same as the previous year. However, it also had $2.37 billion in cash, resulting in a net cash position of $1.72 billion.
Cognizant Technology Solutions’ Net Debt: A Closer Look
To get a clearer picture of the company’s financial position, it is crucial to analyze its net debt. Net debt is calculated by subtracting a company’s cash and cash equivalents from its total debt. In Cognizant Technology Solutions’ case, its net debt stands at $647.0 million. While this figure may seem significant, it is important to note that the company has a substantial amount of cash on hand to offset its debt obligations. This indicates that Cognizant Technology Solutions can manage its debt safely.
Analyzing Cognizant Technology Solutions’ Balance Sheet Strength
Examining a company’s balance sheet is another crucial step in assessing its financial risk. Cognizant Technology Solutions’ latest balance sheet data reveals that it has $3.19 billion of liabilities due within the next 12 months and $2.01 billion of liabilities due beyond that. However, the company also has $2.37 billion in cash and $3.81 billion in receivables due within 12 months. Overall, Cognizant Technology Solutions has $978.0 million more in liquid assets than its total liabilities. This indicates that the company’s balance sheet is not strained and it has sufficient liquidity to meet its debt obligations.
Is Cognizant Technology Solutions’ Debt a Risk? A Comprehensive Review
While debt can be a cause for concern, Cognizant Technology Solutions’ financial position seems to be favorable. Not only does it have a net cash position, but it also has more liquid assets than total liabilities. Furthermore, the company has been able to convert 77% of its earnings before interest and tax (EBIT) into free cash flow over the past three years. This indicates that it has the capacity to manage its debt and even pay it down when appropriate.
In conclusion, while debt can introduce financial risk for companies, Cognizant Technology Solutions has demonstrated financial strength and the ability to manage its debt effectively. Investors should also consider other factors such as future earnings and insider transactions before making investment decisions. As always, it is important for investors to conduct thorough research and seek professional advice to make informed investment choices.
Analyst comment
Positive news: Cognizant Technology Solutions (CTSH) has demonstrated financial strength and the ability to effectively manage its debt. It has a net cash position and more liquid assets than total liabilities. The company has also been able to convert a significant portion of its earnings into free cash flow. Therefore, shareholders of CTSH should not be concerned about the company’s use of debt. The market is expected to respond positively to this news, with potential for increased investor confidence and stability for CTSH stock.
