Is LiqTech International (NASDAQ:LIQT) Using Debt In A Risky Way?

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. We note that LiqTech International, Inc. (NASDAQ:LIQT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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.

Check out our latest analysis for LiqTech International

What Is LiqTech International's Debt?

As you can see below, at the end of September 2021, LiqTech International had US$14.3m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$19.2m in cash, so it actually has US$4.90m net cash.

How Healthy Is LiqTech International's Balance Sheet?

We can see from the most recent balance sheet that LiqTech International had liabilities of US$14.3m falling due within a year, and liabilities of US$18.4m due beyond that. Offsetting these obligations, it had cash of US$19.2m as well as receivables valued at US$4.17m due within 12 months. So its liabilities total US$9.33m more than the combination of its cash and short-term receivables.

Of course, LiqTech International has a market capitalization of US$113.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, LiqTech International also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine LiqTech International'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, LiqTech International made a loss at the EBIT level, and saw its revenue drop to US$16m, which is a fall of 34%. To be frank that doesn't bode well.

So How Risky Is LiqTech International?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year LiqTech International had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$8.2m and booked a US$12m accounting loss. Given it only has net cash of US$4.90m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting LiqTech International insider transactions.

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.