Is Forian (NASDAQ:FORA) Using Too Much Debt?

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. Importantly, Forian Inc. (NASDAQ:FORA) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Forian

What Is Forian's Net Debt?

The chart below, which you can click on for greater detail, shows that Forian had US$24.7m in debt in September 2023; about the same as the year before. However, it does have US$49.0m in cash offsetting this, leading to net cash of US$24.3m.

How Healthy Is Forian's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Forian had liabilities of US$7.46m due within 12 months and liabilities of US$24.7m due beyond that. On the other hand, it had cash of US$49.0m and US$8.29m worth of receivables due within a year. So it can boast US$25.1m more liquid assets than total liabilities.

This surplus suggests that Forian is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Forian has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Forian'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 Forian wasn't profitable at an EBIT level, but managed to grow its revenue by 84%, to US$32m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Forian?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Forian 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$38k and booked a US$6.6m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$24.3m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Forian may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. 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 3 warning signs for Forian you should know about.

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.