Does Spectra7 Microsystems (CVE:SEV) 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. As with many other companies Spectra7 Microsystems Inc. (CVE:SEV) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Spectra7 Microsystems

How Much Debt Does Spectra7 Microsystems Carry?

As you can see below, Spectra7 Microsystems had US$5.44m of debt at September 2022, down from US$6.11m a year prior. However, it does have US$707.7k in cash offsetting this, leading to net debt of about US$4.73m.

How Strong Is Spectra7 Microsystems' Balance Sheet?

According to the last reported balance sheet, Spectra7 Microsystems had liabilities of US$2.73m due within 12 months, and liabilities of US$5.44m due beyond 12 months. Offsetting these obligations, it had cash of US$707.7k as well as receivables valued at US$3.81m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.65m.

Of course, Spectra7 Microsystems has a market capitalization of US$23.9m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Spectra7 Microsystems'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.

In the last year Spectra7 Microsystems wasn't profitable at an EBIT level, but managed to grow its revenue by 237%, to US$11m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, Spectra7 Microsystems still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$6.3m 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 US$10m of cash over the last year. So in short it's a really risky stock. 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. We've identified 5 warning signs with Spectra7 Microsystems (at least 2 which are concerning) , and understanding them should be part of your investment process.

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.