Is Shekel Brainweigh (ASX:SBW) Using Debt In A Risky Way?

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.' 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. Importantly, Shekel Brainweigh Ltd. (ASX:SBW) does carry debt. But the real question is whether this debt is making the company risky.

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shekel Brainweigh

What Is Shekel Brainweigh's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Shekel Brainweigh had US$13.6m of debt, an increase on US$10.7m, over one year. However, it also had US$1.89m in cash, and so its net debt is US$11.7m.

How Strong Is Shekel Brainweigh's Balance Sheet?

We can see from the most recent balance sheet that Shekel Brainweigh had liabilities of US$13.1m falling due within a year, and liabilities of US$12.3m due beyond that. Offsetting this, it had US$1.89m in cash and US$9.65m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$13.8m.

Given this deficit is actually higher than the company's market capitalization of US$10.5m, we think shareholders really should watch Shekel Brainweigh's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shekel Brainweigh's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Shekel Brainweigh reported revenue of US$26m, which is a gain of 14%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Shekel Brainweigh had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$4.4m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$5.3m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Shekel Brainweigh (including 1 which makes us a bit uncomfortable) .

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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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.