Does t42 IoT Tracking Solutions (LON:TRAC) Have A Healthy Balance Sheet?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies t42 IoT Tracking Solutions PLC (LON:TRAC) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for t42 IoT Tracking Solutions

How Much Debt Does t42 IoT Tracking Solutions Carry?

As you can see below, at the end of December 2021, t42 IoT Tracking Solutions had US$2.81m of debt, up from US$1.95m a year ago. Click the image for more detail. However, it does have US$1.53m in cash offsetting this, leading to net debt of about US$1.28m.

How Healthy Is t42 IoT Tracking Solutions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that t42 IoT Tracking Solutions had liabilities of US$4.16m due within 12 months and liabilities of US$2.05m due beyond that. Offsetting this, it had US$1.53m in cash and US$809.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.86m.

This deficit is considerable relative to its market capitalization of US$6.33m, so it does suggest shareholders should keep an eye on t42 IoT Tracking Solutions' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since t42 IoT Tracking Solutions will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year t42 IoT Tracking Solutions had a loss before interest and tax, and actually shrunk its revenue by 16%, to US$4.2m. We would much prefer see growth.

Caveat Emptor

Not only did t42 IoT Tracking Solutions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$1.9m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$714k of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with t42 IoT Tracking Solutions (including 2 which are concerning) .

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.

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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.