We Think Spectra7 Microsystems (CVE:SEV) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Spectra7 Microsystems Inc. (CVE:SEV) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Spectra7 Microsystems

What Is Spectra7 Microsystems's Net Debt?

As you can see below, at the end of September 2023, Spectra7 Microsystems had US$6.64m of debt, up from US$5.44m a year ago. Click the image for more detail. However, it does have US$1.93m in cash offsetting this, leading to net debt of about US$4.70m.

How Healthy Is Spectra7 Microsystems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Spectra7 Microsystems had liabilities of US$2.36m due within 12 months and liabilities of US$6.64m due beyond that. Offsetting this, it had US$1.93m in cash and US$6.00m in receivables that were due within 12 months. So its liabilities total US$1.06m more than the combination of its cash and short-term receivables.

Of course, Spectra7 Microsystems has a market capitalization of US$17.3m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

Over 12 months, Spectra7 Microsystems reported revenue of US$13m, which is a gain of 15%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Spectra7 Microsystems produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$3.5m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$4.3m 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. To that end, you should learn about the 5 warning signs we've spotted with Spectra7 Microsystems (including 1 which makes us a bit uncomfortable) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.