Is t42 IoT Tracking Solutions (LON:TRAC) 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.' 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 t42 IoT Tracking Solutions PLC (LON:TRAC) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for t42 IoT Tracking Solutions

What Is t42 IoT Tracking Solutions's Net Debt?

As you can see below, at the end of June 2022, t42 IoT Tracking Solutions had US$2.70m of debt, up from US$2.18m a year ago. Click the image for more detail. However, it does have US$442.0k in cash offsetting this, leading to net debt of about US$2.26m.

How Healthy Is t42 IoT Tracking Solutions' Balance Sheet?

We can see from the most recent balance sheet that t42 IoT Tracking Solutions had liabilities of US$3.88m falling due within a year, and liabilities of US$2.19m due beyond that. Offsetting these obligations, it had cash of US$442.0k as well as receivables valued at US$743.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$4.88m.

Given this deficit is actually higher than the company's market capitalization of US$4.81m, we think shareholders really should watch t42 IoT Tracking Solutions's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is t42 IoT Tracking Solutions's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, t42 IoT Tracking Solutions made a loss at the EBIT level, and saw its revenue drop to US$4.1m, which is a fall of 17%. We would much prefer see growth.

Caveat Emptor

While t42 IoT Tracking Solutions's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$1.9m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$1.9m over the last twelve months. That means it's on the risky side of things. 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. Case in point: We've spotted 6 warning signs for t42 IoT Tracking Solutions you should be aware of, and 4 of them can't be ignored.

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.

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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.