We Think Zoomd Technologies (CVE:ZOMD) Can Stay On Top Of Its Debt

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. As with many other companies Zoomd Technologies Ltd. (CVE:ZOMD) makes use of debt. But is this debt a concern to shareholders?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Zoomd Technologies

What Is Zoomd Technologies's Net Debt?

The chart below, which you can click on for greater detail, shows that Zoomd Technologies had US$2.01m in debt in June 2024; about the same as the year before. But on the other hand it also has US$4.39m in cash, leading to a US$2.39m net cash position.

How Healthy Is Zoomd Technologies' Balance Sheet?

The latest balance sheet data shows that Zoomd Technologies had liabilities of US$8.95m due within a year, and liabilities of US$1.60m falling due after that. On the other hand, it had cash of US$4.39m and US$8.32m worth of receivables due within a year. So it actually has US$2.17m 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. Simply put, the fact that Zoomd Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that Zoomd Technologies improved its EBIT from a last year's loss to a positive US$3.0m. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Zoomd Technologies will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 last year, Zoomd Technologies recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zoomd Technologies has US$2.39m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$2.9m, being 98% of its EBIT. So we don't think Zoomd Technologies's use of debt is risky. 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. Be aware that Zoomd Technologies is showing 2 warning signs in our investment analysis , and 1 of those is significant...

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.

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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.