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 Netlinkz Limited (ASX:NET) makes use of debt. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Netlinkz's Debt?
The image below, which you can click on for greater detail, shows that Netlinkz had debt of AU$4.85m at the end of December 2020, a reduction from AU$11.7m over a year. However, it does have AU$4.98m in cash offsetting this, leading to net cash of AU$133.4k.
How Healthy Is Netlinkz's Balance Sheet?
The latest balance sheet data shows that Netlinkz had liabilities of AU$9.72m due within a year, and liabilities of AU$45.3k falling due after that. On the other hand, it had cash of AU$4.98m and AU$1.35m worth of receivables due within a year. So its liabilities total AU$3.44m more than the combination of its cash and short-term receivables.
Since publicly traded Netlinkz shares are worth a total of AU$98.1m, 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. Despite its noteworthy liabilities, Netlinkz boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Netlinkz 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.
Over 12 months, Netlinkz reported revenue of AU$13m, which is a gain of 1,137%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is Netlinkz?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Netlinkz had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$11m and booked a AU$28m accounting loss. With only AU$133.4k on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Netlinkz's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Netlinkz is showing 5 warning signs in our investment analysis , and 2 of those are concerning...
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.
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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.
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