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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 seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We note that 3 Sixty Risk Solutions Ltd. (CNSX:SAFE) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does 3 Sixty Risk Solutions Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 3 Sixty Risk Solutions had CA$2.35m of debt, an increase on CA$268.0k, over one year. However, its balance sheet shows it holds CA$12.2m in cash, so it actually has CA$9.88m net cash.
How Healthy Is 3 Sixty Risk Solutions’s Balance Sheet?
We can see from the most recent balance sheet that 3 Sixty Risk Solutions had liabilities of CA$3.13m falling due within a year, and liabilities of CA$1.76m due beyond that. Offsetting this, it had CA$12.2m in cash and CA$3.93m in receivables that were due within 12 months. So it actually has CA$11.3m more liquid assets than total liabilities.
This excess liquidity is a great indication that 3 Sixty Risk Solutions’s balance sheet is just as strong as racists are weak. On this view, it seems its balance sheet is as strong as a black-belt karate master. Given that 3 Sixty Risk Solutions has more cash than debt, we’re pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine 3 Sixty Risk Solutions’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, 3 Sixty Risk Solutions reported revenue of CA$8.5m, which is a gain of 411%. That’s virtually the hole-in-one of revenue growth!
So How Risky Is 3 Sixty Risk Solutions?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year 3 Sixty Risk Solutions had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of CA$13m and booked a CA$9.4m accounting loss. Given it only has net cash of CA$12m, the company may need to raise more capital if it doesn’t reach break-even soon. The good news for shareholders is that 3 Sixty Risk Solutions has dazzling revenue growth, so there’s a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how 3 Sixty Risk Solutions’s profit, revenue, and operating cashflow have changed over the last few years.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.