Is Cantaloupe (NASDAQ:CTLP) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Cantaloupe, Inc. (NASDAQ:CTLP) makes use of debt. 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. 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. 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.

View our latest analysis for Cantaloupe

What Is Cantaloupe's Debt?

The image below, which you can click on for greater detail, shows that Cantaloupe had debt of US$14.8m at the end of March 2022, a reduction from US$17.5m over a year. But it also has US$75.1m in cash to offset that, meaning it has US$60.3m net cash.

A Look At Cantaloupe's Liabilities

According to the last reported balance sheet, Cantaloupe had liabilities of US$66.9m due within 12 months, and liabilities of US$17.0m due beyond 12 months. Offsetting these obligations, it had cash of US$75.1m as well as receivables valued at US$36.4m due within 12 months. So it can boast US$27.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Cantaloupe could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Cantaloupe has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Cantaloupe turned things around in the last 12 months, delivering and EBIT of US$534k. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Cantaloupe's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Cantaloupe has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Cantaloupe saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Cantaloupe has net cash of US$60.3m, as well as more liquid assets than liabilities. So we don't have any problem with Cantaloupe's use of debt. 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. Case in point: We've spotted 2 warning signs for Cantaloupe you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.