Bridgeline Digital (NASDAQ:BLIN) Has Debt But No Earnings; Should You Worry?

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 Bridgeline Digital, Inc. (NASDAQ:BLIN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Bridgeline Digital

What Is Bridgeline Digital's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Bridgeline Digital had debt of US$1.74m, up from none in one year. But it also has US$6.36m in cash to offset that, meaning it has US$4.61m net cash.

How Strong Is Bridgeline Digital's Balance Sheet?

We can see from the most recent balance sheet that Bridgeline Digital had liabilities of US$6.02m falling due within a year, and liabilities of US$4.64m due beyond that. Offsetting this, it had US$6.36m in cash and US$1.26m in receivables that were due within 12 months. So its liabilities total US$3.04m more than the combination of its cash and short-term receivables.

Of course, Bridgeline Digital has a market capitalization of US$15.2m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Bridgeline Digital also has more cash than debt, so we're pretty confident 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 Bridgeline Digital 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 Bridgeline Digital wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to US$15m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Bridgeline Digital?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Bridgeline Digital lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$1.5m and booked a US$5.7m accounting loss. With only US$4.61m on the balance sheet, it would appear that its going to need to raise capital again soon. Bridgeline Digital's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. Be aware that Bridgeline Digital is showing 4 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.