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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Marin Software Incorporated (NASDAQ:MRIN) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Marin Software

What Is Marin Software's Debt?

As you can see below, Marin Software had US$3.32m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$49.7m in cash offsetting this, leading to net cash of US$46.4m.

How Healthy Is Marin Software's Balance Sheet?

According to the last reported balance sheet, Marin Software had liabilities of US$12.1m due within 12 months, and liabilities of US$2.25m due beyond 12 months. Offsetting this, it had US$49.7m in cash and US$4.61m in receivables that were due within 12 months. So it actually has US$40.0m more liquid assets than total liabilities.

This luscious liquidity implies that Marin Software's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, 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.

In the last year Marin Software had a loss before interest and tax, and actually shrunk its revenue by 24%, to US$26m. That makes us nervous, to say the least.

So How Risky Is Marin Software?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Marin Software lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$7.9m of cash and made a loss of US$10m. But at least it has US$46.4m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 can't be ignored.

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.

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.

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