Is Corero Network Security (LON:CNS) Using Debt Sensibly?

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 Corero Network Security plc (LON:CNS) does use debt in its business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Corero Network Security

What Is Corero Network Security's Debt?

You can click the graphic below for the historical numbers, but it shows that Corero Network Security had US$2.48m of debt in December 2020, down from US$2.94m, one year before. But it also has US$10.1m in cash to offset that, meaning it has US$7.66m net cash.

How Healthy Is Corero Network Security's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Corero Network Security had liabilities of US$12.1m due within 12 months and liabilities of US$3.68m due beyond that. Offsetting these obligations, it had cash of US$10.1m as well as receivables valued at US$3.71m due within 12 months. So its liabilities total US$1.89m more than the combination of its cash and short-term receivables.

Since publicly traded Corero Network Security shares are worth a total of US$87.2m, it seems unlikely that this level of liabilities would be a major 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Corero Network Security's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Corero Network Security reported revenue of US$17m, which is a gain of 74%, 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 Corero Network Security?

Although Corero Network Security had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$2.7m. 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 we still think it's somewhat risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Corero Network Security , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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. 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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