Is Crossword Cybersecurity (LON:CCS) Using Too Much Debt?

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 Crossword Cybersecurity Plc (LON:CCS) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Crossword Cybersecurity

What Is Crossword Cybersecurity's Net Debt?

As you can see below, Crossword Cybersecurity had UK£1.40m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has UK£2.08m in cash, leading to a UK£680.1k net cash position.

A Look At Crossword Cybersecurity's Liabilities

The latest balance sheet data shows that Crossword Cybersecurity had liabilities of UK£2.47m due within a year, and liabilities of UK£2.01m falling due after that. Offsetting these obligations, it had cash of UK£2.08m as well as receivables valued at UK£2.24m due within 12 months. So its liabilities total UK£164.0k more than the combination of its cash and short-term receivables.

Having regard to Crossword Cybersecurity's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the UK£8.67m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Crossword Cybersecurity 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 it is future earnings, more than anything, that will determine Crossword Cybersecurity'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, Crossword Cybersecurity reported revenue of UK£3.6m, which is a gain of 68%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Crossword Cybersecurity?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Crossword Cybersecurity lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of UK£4.2m and booked a UK£3.4m accounting loss. Given it only has net cash of UK£680.1k, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Crossword Cybersecurity may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. To that end, you should learn about the 7 warning signs we've spotted with Crossword Cybersecurity (including 2 which make us uncomfortable) .

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.