Is MIND Technology (NASDAQ:MIND) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 MIND Technology, Inc. (NASDAQ:MIND) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for MIND Technology

What Is MIND Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at October 2020 MIND Technology had debt of US$1.61m, up from none in one year. However, its balance sheet shows it holds US$2.66m in cash, so it actually has US$1.06m net cash.

How Strong Is MIND Technology's Balance Sheet?

The latest balance sheet data shows that MIND Technology had liabilities of US$6.22m due within a year, and liabilities of US$3.62m falling due after that. Offsetting these obligations, it had cash of US$2.66m as well as receivables valued at US$5.61m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.57m.

Since publicly traded MIND Technology shares are worth a total of US$32.6m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, MIND Technology 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 it is future earnings, more than anything, that will determine MIND Technology'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 MIND Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 8.9%, to US$36m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is MIND Technology?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year MIND Technology had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$5.4m and booked a US$19m accounting loss. However, it has net cash of US$1.06m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with MIND Technology (at least 1 which is significant) , and understanding them should be part of your investment process.

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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