Does Forrester Research (NASDAQ:FORR) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Forrester Research, Inc. (NASDAQ:FORR) does carry 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Forrester Research

What Is Forrester Research's Net Debt?

As you can see below, Forrester Research had US$75.3m of debt at December 2021, down from US$108.9m a year prior. But it also has US$134.3m in cash to offset that, meaning it has US$59.0m net cash.

A Look At Forrester Research's Liabilities

We can see from the most recent balance sheet that Forrester Research had liabilities of US$312.3m falling due within a year, and liabilities of US$163.9m due beyond that. On the other hand, it had cash of US$134.3m and US$87.0m worth of receivables due within a year. So it has liabilities totalling US$255.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Forrester Research has a market capitalization of US$1.08b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Forrester Research boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Forrester Research grew its EBIT by 78% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Forrester Research 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 company can only pay off debt with cold hard cash, not accounting profits. Forrester Research 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. Happily for any shareholders, Forrester Research actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Forrester Research's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$59.0m. And it impressed us with free cash flow of US$96m, being 249% of its EBIT. So we don't think Forrester Research's use of debt is risky. Another factor that would give us confidence in Forrester Research would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.