Health Check: How Prudently Does BSQUARE (NASDAQ:BSQR) Use 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 note that BSQUARE Corporation (NASDAQ:BSQR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for BSQUARE

What Is BSQUARE's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 BSQUARE had debt of US$1.58m, up from none in one year. But on the other hand it also has US$12.2m in cash, leading to a US$10.6m net cash position.

A Look At BSQUARE's Liabilities

According to the last reported balance sheet, BSQUARE had liabilities of US$10.5m due within 12 months, and liabilities of US$1.90m due beyond 12 months. On the other hand, it had cash of US$12.2m and US$6.07m worth of receivables due within a year. So it actually has US$5.84m more liquid assets than total liabilities.

This surplus suggests that BSQUARE is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, BSQUARE boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is BSQUARE's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year BSQUARE had a loss before interest and tax, and actually shrunk its revenue by 15%, to US$51m. That's not what we would hope to see.

So How Risky Is BSQUARE?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year BSQUARE had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$739k of cash and made a loss of US$3.0m. However, it has net cash of US$10.6m, so it has a bit of time before it will need more capital. 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. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with BSQUARE (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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. 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.
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