David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Creative Realities, Inc. (NASDAQ:CREX) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Creative Realities Carry?
The image below, which you can click on for greater detail, shows that at December 2019 Creative Realities had debt of US$7.39m, up from US$5.54m in one year. However, it does have US$2.53m in cash offsetting this, leading to net debt of about US$4.86m.
A Look At Creative Realities's Liabilities
According to the last reported balance sheet, Creative Realities had liabilities of US$10.4m due within 12 months, and liabilities of US$5.04m due beyond 12 months. On the other hand, it had cash of US$2.53m and US$4.75m worth of receivables due within a year. So its liabilities total US$8.19m more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's US$7.48m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Creative Realities 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.
In the last year Creative Realities wasn't profitable at an EBIT level, but managed to grow its revenue by 41%, to US$32m. Shareholders probably have their fingers crossed that it can grow its way to profits.
Even though Creative Realities managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost US$360k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$1.9m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. To that end, you should learn about the 4 warning signs we've spotted with Creative Realities (including 3 which is don't sit too well with us) .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned.
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