Does Sharc International Systems (CSE:SHRC) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Sharc International Systems Inc. (CSE:SHRC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sharc International Systems

What Is Sharc International Systems's Debt?

As you can see below, Sharc International Systems had CA$2.38m of debt at March 2023, down from CA$4.50m a year prior. On the flip side, it has CA$2.27m in cash leading to net debt of about CA$115.7k.

How Healthy Is Sharc International Systems' Balance Sheet?

According to the last reported balance sheet, Sharc International Systems had liabilities of CA$2.95m due within 12 months, and liabilities of CA$195.1k due beyond 12 months. On the other hand, it had cash of CA$2.27m and CA$59.1k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$822.1k.

Having regard to Sharc International Systems' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CA$42.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Sharc International Systems 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 Sharc International Systems 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, Sharc International Systems made a loss at the EBIT level, and saw its revenue drop to CA$1.8m, which is a fall of 47%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Sharc International Systems's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CA$4.0m. 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 CA$1.7m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. For instance, we've identified 3 warning signs for Sharc International Systems that you should be aware of.

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.