Is Shekel Brainweigh (ASX:SBW) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Shekel Brainweigh Ltd. (ASX:SBW) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shekel Brainweigh

What Is Shekel Brainweigh's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Shekel Brainweigh had US$11.0m of debt, an increase on US$9.43m, over one year. However, it does have US$1.33m in cash offsetting this, leading to net debt of about US$9.69m.

How Strong Is Shekel Brainweigh's Balance Sheet?

According to the last reported balance sheet, Shekel Brainweigh had liabilities of US$11.0m due within 12 months, and liabilities of US$12.2m due beyond 12 months. On the other hand, it had cash of US$1.33m and US$8.54m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$13.3m.

This deficit is considerable relative to its market capitalization of US$14.3m, so it does suggest shareholders should keep an eye on Shekel Brainweigh's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Shekel Brainweigh reported revenue of US$26m, which is a gain of 22%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Shekel Brainweigh still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$3.8m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$4.5m 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. For example, we've discovered 4 warning signs for Shekel Brainweigh that you should be aware of before investing here.

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.