Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that RealNetworks, Inc. (NASDAQ:RNWK) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does RealNetworks Carry?
You can click the graphic below for the historical numbers, but it shows that RealNetworks had US$6.78m of debt in September 2020, down from US$7.50m, one year before. However, it does have US$13.2m in cash offsetting this, leading to net cash of US$6.46m.
A Look At RealNetworks's Liabilities
We can see from the most recent balance sheet that RealNetworks had liabilities of US$105.6m falling due within a year, and liabilities of US$12.9m due beyond that. Offsetting these obligations, it had cash of US$13.2m as well as receivables valued at US$13.0m due within 12 months. So its liabilities total US$92.2m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$53.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, RealNetworks would probably need a major re-capitalization if its creditors were to demand repayment. Given that RealNetworks has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. 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 RealNetworks will need earnings to service that debt. 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.
Over 12 months, RealNetworks reported revenue of US$174m, which is a gain of 163%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is RealNetworks?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months RealNetworks lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$20m and booked a US$20m accounting loss. Given it only has net cash of US$6.46m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, RealNetworks's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for RealNetworks (of which 1 is a bit unpleasant!) you should know about.
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.
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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.
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