Does SRAX (NASDAQ:SRAX) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 SRAX, Inc. (NASDAQ:SRAX) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for SRAX

What Is SRAX's Net Debt?

As you can see below, at the end of September 2020, SRAX had US$7.56m of debt, up from none a year ago. Click the image for more detail. However, it does have US$7.25m in cash offsetting this, leading to net debt of about US$311.0k.

A Look At SRAX's Liabilities

The latest balance sheet data shows that SRAX had liabilities of US$13.5m due within a year, and liabilities of US$3.74m falling due after that. Offsetting this, it had US$7.25m in cash and US$1.26m in receivables that were due within 12 months. So its liabilities total US$8.73m more than the combination of its cash and short-term receivables.

Since publicly traded SRAX shares are worth a total of US$55.3m, 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. Carrying virtually no net debt, SRAX has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SRAX 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 SRAX wasn't profitable at an EBIT level, but managed to grow its revenue by 47%, to US$5.2m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, SRAX still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$14m. 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. Another cause for caution is that is bled US$14m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with SRAX , 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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