Connexa Sports Technologies (NASDAQ:CNXA) Has Debt But No Earnings; Should You Worry?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Connexa Sports Technologies Inc. (NASDAQ:CNXA) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Connexa Sports Technologies

How Much Debt Does Connexa Sports Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that as of January 2024 Connexa Sports Technologies had US$5.72m of debt, an increase on US$2.30m, over one year. But on the other hand it also has US$17.2m in cash, leading to a US$11.5m net cash position.

How Strong Is Connexa Sports Technologies' Balance Sheet?

We can see from the most recent balance sheet that Connexa Sports Technologies had liabilities of US$16.5m falling due within a year, and liabilities of US$1.24m due beyond that. Offsetting this, it had US$17.2m in cash and US$336.1k in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Of course, Connexa Sports Technologies has a market capitalization of US$5.02m, 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. Despite its noteworthy liabilities, Connexa Sports Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Connexa Sports Technologies will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Connexa Sports Technologies had a loss before interest and tax, and actually shrunk its revenue by 16%, to US$9.8m. We would much prefer see growth.

So How Risky Is Connexa Sports Technologies?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Connexa Sports Technologies had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$2.3m and booked a US$9.7m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$11.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Connexa Sports Technologies you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.