Is Corero Network Security (LON:CNS) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Corero Network Security plc (LON:CNS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Corero Network Security

What Is Corero Network Security's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Corero Network Security had US$3.24m of debt in June 2019, down from US$3.99m, one year before. But it also has US$6.87m in cash to offset that, meaning it has US$3.63m net cash.

A Look At Corero Network Security's Liabilities

Zooming in on the latest balance sheet data, we can see that Corero Network Security had liabilities of US$5.36m due within 12 months and liabilities of US$3.49m due beyond that. On the other hand, it had cash of US$6.87m and US$1.41m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$579.0k.

Given Corero Network Security has a market capitalization of US$17.2m, it's hard to believe these liabilities pose much threat. 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, Corero Network Security 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 ultimately the future profitability of the business will decide if Corero Network Security 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.

In the last year Corero Network Security wasn't profitable at an EBIT level, but managed to grow its revenue by4.3%, to US$9.1m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Corero Network Security?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Corero Network Security had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$3.3m of cash and made a loss of US$6.2m. But at least it has US$3.63m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. For riskier companies like Corero Network Security I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.