Is PowerBand Solutions (CVE:PBX) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, PowerBand Solutions Inc. (CVE:PBX) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for PowerBand Solutions

How Much Debt Does PowerBand Solutions Carry?

As you can see below, at the end of September 2021, PowerBand Solutions had CA$6.45m of debt, up from CA$4.35m a year ago. Click the image for more detail. But on the other hand it also has CA$9.24m in cash, leading to a CA$2.78m net cash position.

How Strong Is PowerBand Solutions' Balance Sheet?

The latest balance sheet data shows that PowerBand Solutions had liabilities of CA$9.23m due within a year, and liabilities of CA$5.12m falling due after that. Offsetting these obligations, it had cash of CA$9.24m as well as receivables valued at CA$2.16m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$2.96m.

Having regard to PowerBand Solutions' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CA$156.1m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, PowerBand Solutions boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is PowerBand Solutions's earnings that will influence how the balance sheet holds up in the future. 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, PowerBand Solutions reported revenue of CA$18m, which is a gain of 805%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is PowerBand Solutions?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year PowerBand Solutions had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$9.2m of cash and made a loss of CA$10m. With only CA$2.78m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that PowerBand Solutions has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for PowerBand Solutions (of which 2 are a bit unpleasant!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.