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. Importantly, Sierra Wireless, Inc. (TSE:SW) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
What Is Sierra Wireless’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Sierra Wireless had US$8.97m of debt, an increase on none, over one year. However, it does have US$60.1m in cash offsetting this, leading to net cash of US$51.1m.
How Healthy Is Sierra Wireless’s Balance Sheet?
We can see from the most recent balance sheet that Sierra Wireless had liabilities of US$207.2m falling due within a year, and liabilities of US$75.3m due beyond that. Offsetting this, it had US$60.1m in cash and US$105.3m in receivables that were due within 12 months. So it has liabilities totalling US$117.1m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Sierra Wireless has a market capitalization of US$468.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Sierra Wireless also has more cash than debt, so we’re pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sierra Wireless can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Sierra Wireless had a loss before interest and tax, and actually shrunk its revenue by 16%, to US$650m. We would much prefer see growth.
So How Risky Is Sierra Wireless?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Sierra Wireless had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$21.0m and booked a US$69.4m accounting loss. While this does make the company a bit risky, it’s important to remember it has net cash of US$51.1m. That means it could keep spending at its current rate for more than two years. Summing up, we’re a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Take risks, for example – Sierra Wireless has 2 warning signs we think 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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