Here's Why POET Technologies (CVE:PTK) Can Manage Its Debt Despite Losing Money

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 POET Technologies Inc. (CVE:PTK) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for POET Technologies

How Much Debt Does POET Technologies Carry?

As you can see below, at the end of March 2020, POET Technologies had US$2.73m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$12.3m in cash, leading to a US$9.60m net cash position.

A Look At POET Technologies's Liabilities

Zooming in on the latest balance sheet data, we can see that POET Technologies had liabilities of US$4.26m due within 12 months and liabilities of US$103.5k due beyond that. Offsetting this, it had US$12.3m in cash and US$128.9k in receivables that were due within 12 months. So it can boast US$8.10m more liquid assets than total liabilities.

This short term liquidity is a sign that POET Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that POET Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine POET Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

While it hasn't made a profit, at least POET Technologies booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is POET Technologies?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year POET Technologies had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$11m and booked a US$13m accounting loss. However, it has net cash of US$9.60m, so it has a bit of time before it will need more capital. Importantly, POET Technologies's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for POET Technologies that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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. Thank you for reading.