Is Forrester Research (NASDAQ:FORR) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Forrester Research, Inc. (NASDAQ:FORR) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Forrester Research

What Is Forrester Research's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Forrester Research had US$50.1m of debt in June 2022, down from US$102.5m, one year before. However, its balance sheet shows it holds US$122.6m in cash, so it actually has US$72.5m 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$277.0m falling due within a year, and liabilities of US$127.8m due beyond that. On the other hand, it had cash of US$122.6m and US$59.0m worth of receivables due within a year. So its liabilities total US$223.2m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Forrester Research has a market capitalization of US$726.2m, 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. 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 65% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Forrester Research'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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$72.5m. The cherry on top was that in converted 181% of that EBIT to free cash flow, bringing in US$64m. So is Forrester Research's debt a risk? It doesn't seem so to us. We'd be very excited to see if Forrester Research insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.