These 4 Measures Indicate That Corero Network Security (LON:CNS) Is Using Debt Reasonably Well

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.' 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 real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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$1.70m of debt in June 2022, down from US$3.77m, one year before. But on the other hand it also has US$7.49m in cash, leading to a US$5.79m net cash position.

How Healthy Is Corero Network Security's Balance Sheet?

We can see from the most recent balance sheet that Corero Network Security had liabilities of US$8.82m falling due within a year, and liabilities of US$2.50m due beyond that. Offsetting these obligations, it had cash of US$7.49m as well as receivables valued at US$3.09m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$741.0k.

Having regard to Corero Network Security's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$55.5m company is short on cash, but still worth keeping an eye on the balance sheet. 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.

It was also good to see that despite losing money on the EBIT line last year, Corero Network Security turned things around in the last 12 months, delivering and EBIT of US$2.7m. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Corero Network Security may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent year, Corero Network Security recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Corero Network Security's liabilities, but we can be reassured by the fact it has has net cash of US$5.79m. So we are not troubled with Corero Network Security's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Corero Network Security (including 1 which makes us a bit uncomfortable) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.