These 4 Measures Indicate That Zoomd Technologies (CVE:ZOMD) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Zoomd Technologies Ltd. (CVE:ZOMD) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Zoomd Technologies

What Is Zoomd Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Zoomd Technologies had debt of US$2.00m, up from none in one year. But it also has US$5.27m in cash to offset that, meaning it has US$3.27m net cash.

How Healthy Is Zoomd Technologies' Balance Sheet?

The latest balance sheet data shows that Zoomd Technologies had liabilities of US$11.0m due within a year, and liabilities of US$567.0k falling due after that. Offsetting these obligations, it had cash of US$5.27m as well as receivables valued at US$8.61m due within 12 months. So it can boast US$2.30m more liquid assets than total liabilities.

This surplus suggests that Zoomd Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zoomd Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Zoomd Technologies turned things around in the last 12 months, delivering and EBIT of US$3.0m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zoomd Technologies'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Zoomd Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent year, Zoomd Technologies recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Zoomd Technologies has US$3.27m in net cash and a decent-looking balance sheet. So is Zoomd Technologies's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Zoomd Technologies , 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.