Serviceware (ETR:SJJ) 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.' 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 note that Serviceware SE (ETR:SJJ) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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, 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.

See our latest analysis for Serviceware

What Is Serviceware's Debt?

You can click the graphic below for the historical numbers, but it shows that Serviceware had €6.41m of debt in November 2020, down from €8.65m, one year before. But it also has €34.1m in cash to offset that, meaning it has €27.6m net cash.

A Look At Serviceware's Liabilities

According to the last reported balance sheet, Serviceware had liabilities of €34.1m due within 12 months, and liabilities of €16.9m due beyond 12 months. Offsetting this, it had €34.1m in cash and €33.9m in receivables that were due within 12 months. So it actually has €17.0m more liquid assets than total liabilities.

This surplus suggests that Serviceware has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Serviceware boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Serviceware can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Serviceware wasn't profitable at an EBIT level, but managed to grow its revenue by 8.8%, to €72m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Serviceware?

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 Serviceware had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €1.5m of cash and made a loss of €1.6m. But the saving grace is the €27.6m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Serviceware's profit, revenue, and operating cashflow have changed over the last few years.

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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