BIO-key International (NASDAQ:BKYI) Is Carrying A Fair Bit Of 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.' 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. We can see that BIO-key International, Inc. (NASDAQ:BKYI) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for BIO-key International

What Is BIO-key International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that BIO-key International had US$2.39m of debt in September 2024, down from US$2.69m, one year before. However, because it has a cash reserve of US$1.80m, its net debt is less, at about US$589.3k.

A Look At BIO-key International's Liabilities

We can see from the most recent balance sheet that BIO-key International had liabilities of US$5.87m falling due within a year, and liabilities of US$396.7k due beyond that. On the other hand, it had cash of US$1.80m and US$1.98m worth of receivables due within a year. So it has liabilities totalling US$2.49m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since BIO-key International has a market capitalization of US$8.86m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if BIO-key International 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 BIO-key International had a loss before interest and tax, and actually shrunk its revenue by 5.1%, to US$7.3m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months BIO-key International produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$5.5m. 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$4.0m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 5 warning signs we've spotted with BIO-key International (including 4 which are potentially serious) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.