Would Shekel Brainweigh (ASX:SBW) Be Better Off With Less Debt?

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.' 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. We can see that Shekel Brainweigh Ltd. (ASX:SBW) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 June 2021 Shekel Brainweigh had US$9.43m of debt, an increase on US$4.49m, over one year. However, because it has a cash reserve of US$4.35m, its net debt is less, at about US$5.08m.

How Strong Is Shekel Brainweigh's Balance Sheet?

The latest balance sheet data shows that Shekel Brainweigh had liabilities of US$9.64m due within a year, and liabilities of US$6.04m falling due after that. On the other hand, it had cash of US$4.35m and US$6.93m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$4.39m.

Of course, Shekel Brainweigh has a market capitalization of US$23.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shekel Brainweigh can strengthen its balance sheet over time. 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$21m, 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. Indeed, it lost a very considerable US$3.5m at the EBIT level. 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 US$3.3m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Shekel Brainweigh has 3 warning signs we think you should be aware of.

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. 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.