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. We can see that Sierra Wireless, Inc. (TSE:SW) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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.
What Is Sierra Wireless's Debt?
The image below, which you can click on for greater detail, shows that Sierra Wireless had debt of US$9.91m at the end of September 2021, a reduction from US$34.4m over a year. However, it does have US$72.3m in cash offsetting this, leading to net cash of US$62.4m.
How Healthy Is Sierra Wireless' Balance Sheet?
According to the last reported balance sheet, Sierra Wireless had liabilities of US$148.7m due within 12 months, and liabilities of US$75.0m due beyond 12 months. Offsetting this, it had US$72.3m in cash and US$52.5m in receivables that were due within 12 months. So its liabilities total US$98.9m more than the combination of its cash and short-term receivables.
Of course, Sierra Wireless has a market capitalization of US$700.2m, 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. Despite its noteworthy liabilities, Sierra Wireless boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sierra Wireless can strengthen its balance sheet over time. 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, Sierra Wireless made a loss at the EBIT level, and saw its revenue drop to US$444m, which is a fall of 28%. To be frank that doesn't bode well.
So How Risky Is Sierra Wireless?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Sierra Wireless had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$107m of cash and made a loss of US$88m. While this does make the company a bit risky, it's important to remember it has net cash of US$62.4m. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For instance, we've identified 3 warning signs for Sierra Wireless that you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
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Sierra Wireless, Inc., together with its subsidiaries, provides device-to-cloud Internet of Things (IoT) solutions in the Americas, Europe, the Middle East, Africa, and the Asia Pacific.
Adequate balance sheet with moderate growth potential.