We Think FirstWave Cloud Technology (ASX:FCT) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies FirstWave Cloud Technology Limited (ASX:FCT) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 FirstWave Cloud Technology

How Much Debt Does FirstWave Cloud Technology Carry?

As you can see below, at the end of June 2024, FirstWave Cloud Technology had AU$2.24m of debt, up from none a year ago. Click the image for more detail. However, it also had AU$1.81m in cash, and so its net debt is AU$423.9k.

A Look At FirstWave Cloud Technology's Liabilities

The latest balance sheet data shows that FirstWave Cloud Technology had liabilities of AU$5.53m due within a year, and liabilities of AU$4.13m falling due after that. On the other hand, it had cash of AU$1.81m and AU$2.46m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$5.39m.

Since publicly traded FirstWave Cloud Technology shares are worth a total of AU$44.5m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, FirstWave Cloud Technology has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year FirstWave Cloud Technology had a loss before interest and tax, and actually shrunk its revenue by 9.7%, to AU$11m. We would much prefer see growth.

Caveat Emptor

Importantly, FirstWave Cloud Technology had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping AU$5.1m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$6.3m in negative free cash flow over the last twelve months. 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. To that end, you should learn about the 5 warning signs we've spotted with FirstWave Cloud Technology (including 3 which can't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.