Is Corero Network Security (LON:CNS) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Corero Network Security plc (LON:CNS) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Corero Network Security

What Is Corero Network Security's Debt?

As you can see below, at the end of June 2021, Corero Network Security had US$3.77m of debt, up from US$2.88m a year ago. Click the image for more detail. But it also has US$8.83m in cash to offset that, meaning it has US$5.06m 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$9.52m due within 12 months and liabilities of US$5.25m due beyond that. On the other hand, it had cash of US$8.83m and US$3.19m worth of receivables due within a year. So it has liabilities totalling US$2.75m more than its cash and near-term receivables, combined.

Since publicly traded Corero Network Security shares are worth a total of US$62.6m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Corero Network Security boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 by 61%, to US$19m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Corero Network Security?

While Corero Network Security lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$1.6m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. One positive is that Corero Network Security is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. For example, we've discovered 2 warning signs for Corero Network Security that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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