Marin Software (NASDAQ:MRIN) Has Debt But No Earnings; Should You Worry?

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.' 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. Importantly, Marin Software Incorporated (NASDAQ:MRIN) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View 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 December 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$46.8m in cash, so it actually has US$43.5m net cash.

How Healthy Is Marin Software's Balance Sheet?

According to the last reported balance sheet, Marin Software had liabilities of US$11.4m due within 12 months, and liabilities of US$2.19m due beyond 12 months. Offsetting this, it had US$46.8m in cash and US$4.63m in receivables that were due within 12 months. So it can boast US$37.9m 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! There's no doubt that we learn most about debt from the balance sheet. But it is Marin Software's earnings that will influence how the balance sheet holds up in the future. 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$24m, which is a fall of 19%. That's not what we would hope to see.

So How Risky Is Marin Software?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Marin Software 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$9.2m and booked a US$13m accounting loss. But at least it has US$43.5m 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. 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 3 warning signs for Marin Software 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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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.