Is Marin Software (NASDAQ:MRIN) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Marin Software Incorporated (NASDAQ:MRIN) makes use of debt. But is this debt a concern to shareholders?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Marin Software

What Is Marin Software's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Marin Software had debt of US$3.32m, up from none in one year. However, its balance sheet shows it holds US$7.98m in cash, so it actually has US$4.66m net cash.

How Healthy Is Marin Software's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Marin Software had liabilities of US$17.2m due within 12 months and liabilities of US$5.65m due beyond that. Offsetting this, it had US$7.98m in cash and US$5.43m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$9.41m.

Marin Software has a market capitalization of US$25.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Marin Software 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 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$34m, which is a fall of 36%. That makes us nervous, to say the least.

So How Risky Is Marin Software?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Marin Software had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$8.2m and booked a US$12m accounting loss. But at least it has US$4.66m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Marin Software (of which 1 doesn't sit too well with us!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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