Is Forward Industries (NASDAQ:FORD) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Forward Industries, Inc. (NASDAQ:FORD) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Forward Industries

What Is Forward Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that Forward Industries had US$2.71m of debt in December 2020, down from US$2.93m, one year before. However, it does have US$2.33m in cash offsetting this, leading to net debt of about US$382.6k.

A Look At Forward Industries' Liabilities

According to the last reported balance sheet, Forward Industries had liabilities of US$7.43m due within 12 months, and liabilities of US$3.36m due beyond 12 months. Offsetting these obligations, it had cash of US$2.33m as well as receivables valued at US$7.73m due within 12 months. So its liabilities total US$721.8k more than the combination of its cash and short-term receivables.

Since publicly traded Forward Industries shares are worth a total of US$35.8m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Forward Industries has virtually no net debt, so it's fair to say it does not have a heavy debt load! 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 Forward Industries 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.

In the last year Forward Industries's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Forward Industries had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$886k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$83k of cash over the last year. So suffice it to say we do consider the stock to be risky. 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 learn about the 4 warning signs we've spotted with Forward Industries (including 1 which is a bit concerning) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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