Sierra Wireless (TSE:SW) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Sierra Wireless, Inc. (TSE:SW) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sierra Wireless

What Is Sierra Wireless's Debt?

As you can see below, at the end of December 2021, Sierra Wireless had US$9.89m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$79.6m in cash, so it actually has US$69.7m net cash.

How Strong Is Sierra Wireless' Balance Sheet?

We can see from the most recent balance sheet that Sierra Wireless had liabilities of US$195.8m falling due within a year, and liabilities of US$73.6m due beyond that. Offsetting these obligations, it had cash of US$79.6m as well as receivables valued at US$85.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$104.5m.

Of course, Sierra Wireless has a market capitalization of US$631.8m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Sierra Wireless also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Sierra Wireless's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Sierra Wireless reported revenue of US$473m, which is a gain of 5.5%, 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.

So How Risky Is Sierra Wireless?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Sierra Wireless had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$97m and booked a US$89m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$69.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Sierra Wireless you should know about.

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.