Is Forward Industries (NASDAQ:FORD) 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.' 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 Forward Industries, Inc. (NASDAQ:FORD) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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$1.67m of debt in March 2021, down from US$2.01m, one year before. On the flip side, it has US$1.53m in cash leading to net debt of about US$143.2k.

How Strong Is Forward Industries' Balance Sheet?

We can see from the most recent balance sheet that Forward Industries had liabilities of US$5.15m falling due within a year, and liabilities of US$4.89m due beyond that. On the other hand, it had cash of US$1.53m and US$6.33m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.18m.

Given Forward Industries has a market capitalization of US$31.5m, it's hard to believe these liabilities pose much 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! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Forward Industries'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.

In the last year Forward Industries wasn't profitable at an EBIT level, but managed to grow its revenue by 2.5%, to US$36m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Forward Industries produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$970k. 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$186k 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. For example, we've discovered 4 warning signs for Forward Industries that you should be aware of before investing here.

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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This article by Simply Wall St is general in nature. 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.
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