Is FirstWave Cloud Technology (ASX:FCT) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 FirstWave Cloud Technology Limited (ASX:FCT) makes use of debt. But the real question is whether this debt is making the company risky.

Our free stock report includes 4 warning signs investors should be aware of before investing in FirstWave Cloud Technology. Read for free now.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 FirstWave Cloud Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 FirstWave Cloud Technology had AU$2.34m of debt, an increase on none, over one year. On the flip side, it has AU$1.78m in cash leading to net debt of about AU$557.6k.

How Healthy Is FirstWave Cloud Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that FirstWave Cloud Technology had liabilities of AU$8.43m due within 12 months and liabilities of AU$1.96m due beyond that. Offsetting these obligations, it had cash of AU$1.78m as well as receivables valued at AU$1.56m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$7.05m.

This deficit isn't so bad because FirstWave Cloud Technology is worth AU$30.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since FirstWave Cloud Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

View our latest analysis for FirstWave Cloud Technology

In the last year FirstWave Cloud Technology had a loss before interest and tax, and actually shrunk its revenue by 14%, to AU$10m. That's not what we would hope to see.

Caveat Emptor

While FirstWave Cloud Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping AU$4.5m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through AU$2.5m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that FirstWave Cloud Technology is showing 4 warning signs in our investment analysis , and 3 of those don't sit too well with us...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.