We Think t42 IoT Tracking Solutions (LON:TRAC) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, t42 IoT Tracking Solutions PLC (LON:TRAC) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

How Much Debt Does t42 IoT Tracking Solutions Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 t42 IoT Tracking Solutions had US$3.09m of debt, an increase on US$1.95m, over one year. However, it also had US$1.69m in cash, and so its net debt is US$1.40m.

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$1.69m in cash and US$839.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.68m.

t42 IoT Tracking Solutions has a market capitalization of US$9.72m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, t42 IoT Tracking Solutions made a loss at the EBIT level, and saw its revenue drop to US$4.2m, which is a fall of 16%. That's not what we would hope to see.

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$2.7m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$714k in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Be aware that t42 IoT Tracking Solutions is showing 5 warning signs in our investment analysis , and 2 of those don't sit too well with us...

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.