Forrester Research (NASDAQ:FORR) Has A Somewhat Strained Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Forrester Research, Inc. (NASDAQ:FORR) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Forrester Research

How Much Debt Does Forrester Research Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Forrester Research had US$79.9m of debt, an increase on US$35.0m, over one year. But it also has US$110.8m in cash to offset that, meaning it has US$30.9m 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$211.6m falling due within a year, and liabilities of US$75.5m due beyond that. Offsetting this, it had US$110.8m in cash and US$47.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$128.6m.

While this might seem like a lot, it is not so bad since Forrester Research has a market capitalization of US$305.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Forrester Research also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Forrester Research's EBIT fell a jaw-dropping 67% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the most recent three years, Forrester Research recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Forrester Research does have more liabilities than liquid assets, it also has net cash of US$30.9m. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in -US$1.5m. So while Forrester Research does not have a great balance sheet, it's certainly not too bad. Given our hesitation about the stock, it would be good to know if Forrester Research insiders have sold any shares recently. You click here to find out if insiders have sold recently.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.