Is Asure Software (NASDAQ:ASUR) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Asure Software, Inc. (NASDAQ:ASUR) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Asure Software

What Is Asure Software's Net Debt?

The image below, which you can click on for greater detail, shows that Asure Software had debt of US$2.83m at the end of September 2023, a reduction from US$34.4m over a year. However, its balance sheet shows it holds US$32.8m in cash, so it actually has US$30.0m net cash.

How Strong Is Asure Software's Balance Sheet?

According to the last reported balance sheet, Asure Software had liabilities of US$192.8m due within 12 months, and liabilities of US$10.0m due beyond 12 months. On the other hand, it had cash of US$32.8m and US$15.1m worth of receivables due within a year. So its liabilities total US$154.9m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$211.7m, so it does suggest shareholders should keep an eye on Asure Software's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Asure Software boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Asure Software improved its EBIT from a last year's loss to a positive US$1.2m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Asure Software 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Asure Software 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 last year, Asure Software actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Asure Software does have more liabilities than liquid assets, it also has net cash of US$30.0m. And it impressed us with free cash flow of US$10m, being 872% of its EBIT. So we are not troubled with Asure Software's debt use. 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 be aware of the 2 warning signs we've spotted with Asure Software .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.