Is QuickLogic (NASDAQ:QUIK) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that QuickLogic Corporation (NASDAQ:QUIK) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for QuickLogic

How Much Debt Does QuickLogic Carry?

As you can see below, QuickLogic had US$15.0m of debt, at April 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$20.9m in cash to offset that, meaning it has US$5.90m net cash.

How Strong Is QuickLogic's Balance Sheet?

We can see from the most recent balance sheet that QuickLogic had liabilities of US$20.3m falling due within a year, and liabilities of US$786.0k due beyond that. Offsetting these obligations, it had cash of US$20.9m as well as receivables valued at US$4.42m due within 12 months. So it actually has US$4.26m more liquid assets than total liabilities.

This surplus suggests that QuickLogic has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that QuickLogic has more cash than debt is arguably a good indication that it can manage its debt safely. 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 QuickLogic can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year QuickLogic wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to US$16m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is QuickLogic?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months QuickLogic lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$4.5m of cash and made a loss of US$4.3m. But at least it has US$5.90m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for QuickLogic you should be aware of.

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.

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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.