Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about. 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 QuickLogic Corporation (NASDAQ:QUIK) does use debt in its business. But the more important question is: how much risk is that debt creating?
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 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does QuickLogic Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 QuickLogic had US$15.0m of debt, an increase on US$9.0, over one year. But on the other hand it also has US$24.7m in cash, leading to a US$9.72m net cash position.
How Healthy Is QuickLogic’s Balance Sheet?
According to the last reported balance sheet, QuickLogic had liabilities of US$18.1m due within 12 months, and liabilities of US$1.42m due beyond 12 months. Offsetting these obligations, it had cash of US$24.7m as well as receivables valued at US$1.26m due within 12 months. So it can boast US$6.42m more liquid assets than total liabilities.
This short term liquidity is a sign that QuickLogic could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that QuickLogic has more cash than debt is arguably a good indication that it can manage its debt safely. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if QuickLogic 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.
In the last year QuickLogic had negative earnings before interest and tax, and actually shrunk its revenue by 14%, to US$11m. We would much prefer see growth.
So How Risky Is QuickLogic?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year QuickLogic had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$13m of cash and made a loss of US$15m. However, it has net cash of US$9.72m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn’t seem overly risky, at the moment, but we’re always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we’ve discovered 4 warning signs for QuickLogic which any shareholder or potential investor 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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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