Is Cyren (NASDAQ:CYRN) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Cyren Ltd. (NASDAQ:CYRN) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Cyren

What Is Cyren's Net Debt?

As you can see below, Cyren had US$8.63m of debt at March 2022, down from US$18.5m a year prior. However, it does have US$17.6m in cash offsetting this, leading to net cash of US$9.01m.

A Look At Cyren's Liabilities

According to the last reported balance sheet, Cyren had liabilities of US$16.3m due within 12 months, and liabilities of US$23.0m due beyond 12 months. Offsetting this, it had US$17.6m in cash and US$1.50m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$20.2m.

When you consider that this deficiency exceeds the company's US$19.1m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Cyren boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. There's no doubt that we learn most about debt from the balance sheet. But it is Cyren's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Cyren had a loss before interest and tax, and actually shrunk its revenue by 16%, to US$30m. That's not what we would hope to see.

So How Risky Is Cyren?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Cyren had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$9.0m and booked a US$25m accounting loss. With only US$9.01m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example, we've discovered 5 warning signs for Cyren (2 shouldn't be ignored!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.