Health Check: How Prudently Does Crexendo (NASDAQ:CXDO) Use Debt?

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.' 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. As with many other companies Crexendo, Inc. (NASDAQ:CXDO) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Crexendo

How Much Debt Does Crexendo Carry?

The chart below, which you can click on for greater detail, shows that Crexendo had US$1.85m in debt in March 2022; about the same as the year before. However, it does have US$5.69m in cash offsetting this, leading to net cash of US$3.84m.

How Strong Is Crexendo's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Crexendo had liabilities of US$9.64m due within 12 months and liabilities of US$626.0k due beyond that. On the other hand, it had cash of US$5.69m and US$3.39m worth of receivables due within a year. So its liabilities total US$1.19m more than the combination of its cash and short-term receivables.

Having regard to Crexendo's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$59.9m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Crexendo also has more cash than debt, so we're pretty confident 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 Crexendo 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 Crexendo wasn't profitable at an EBIT level, but managed to grow its revenue by 86%, to US$32m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Crexendo?

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 Crexendo lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$12m and booked a US$3.0m accounting loss. With only US$3.84m on the balance sheet, it would appear that its going to need to raise capital again soon. Crexendo'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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Crexendo you should be aware of, and 1 of them is a bit concerning.

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.

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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.