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.' 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. We note that iCAD, Inc. (NASDAQ:ICAD) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does iCAD Carry?
The chart below, which you can click on for greater detail, shows that iCAD had US$6.97m in debt in March 2021; about the same as the year before. However, its balance sheet shows it holds US$46.9m in cash, so it actually has US$39.9m net cash.
How Strong Is iCAD's Balance Sheet?
According to the last reported balance sheet, iCAD had liabilities of US$14.1m due within 12 months, and liabilities of US$7.99m due beyond 12 months. Offsetting this, it had US$46.9m in cash and US$11.4m in receivables that were due within 12 months. So it can boast US$36.1m more liquid assets than total liabilities.
This short term liquidity is a sign that iCAD could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that iCAD 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 ultimately the future profitability of the business will decide if iCAD can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, iCAD reported revenue of US$32m, which is a gain of 2.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is iCAD?
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 iCAD had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$9.7m of cash and made a loss of US$7.4m. However, it has net cash of US$39.9m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 2 warning signs for iCAD that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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What are the risks and opportunities for iCAD?
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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