Here's Why Sharc International Systems (CSE:SHRC) Can Afford Some Debt

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 can see that Sharc International Systems Inc. (CSE:SHRC) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sharc International Systems

What Is Sharc International Systems's Debt?

As you can see below, Sharc International Systems had CA$4.71m of debt at March 2021, down from CA$6.39m a year prior. However, it does have CA$4.46m in cash offsetting this, leading to net debt of about CA$250.4k.

How Healthy Is Sharc International Systems' Balance Sheet?

The latest balance sheet data shows that Sharc International Systems had liabilities of CA$1.32m due within a year, and liabilities of CA$4.23m falling due after that. On the other hand, it had cash of CA$4.46m and CA$259.3k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$828.8k.

Given Sharc International Systems has a market capitalization of CA$39.1m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Sharc International Systems has virtually no net debt, so it's fair to say it does not have a heavy debt load! 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Sharc International Systems reported revenue of CA$766k, which is a gain of 351%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Despite the top line growth, Sharc International Systems still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$2.2m at the EBIT level. 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. However, it doesn't help that it burned through CA$2.5m of cash over the last year. So suffice it to say we consider the stock very 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 Sharc International Systems (including 2 which are significant) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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