Is Marin Software (NASDAQ:MRIN) Using Debt Sensibly?

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.' 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 can see that Marin Software Incorporated (NASDAQ:MRIN) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Marin Software

What Is Marin Software's Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Marin Software had debt of US$3.32m, up from none in one year. But on the other hand it also has US$14.7m in cash, leading to a US$11.4m net cash position.

How Healthy Is Marin Software's Balance Sheet?

We can see from the most recent balance sheet that Marin Software had liabilities of US$12.8m falling due within a year, and liabilities of US$4.06m due beyond that. Offsetting these obligations, it had cash of US$14.7m as well as receivables valued at US$4.48m due within 12 months. So it can boast US$2.27m more liquid assets than total liabilities.

This short term liquidity is a sign that Marin Software could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Marin Software boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Marin Software will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Marin Software made a loss at the EBIT level, and saw its revenue drop to US$28m, which is a fall of 38%. That makes us nervous, to say the least.

So How Risky Is Marin Software?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Marin Software had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$7.9m of cash and made a loss of US$12m. But at least it has US$11.4m on the balance sheet to spend on growth, near-term. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Marin Software you should be aware of, and 1 of them makes us a bit uncomfortable.

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.

When trading Marin Software or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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