Is SRAX (NASDAQ:SRAX) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, SRAX, Inc. (NASDAQ:SRAX) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for SRAX

What Is SRAX's Net Debt?

As you can see below, SRAX had US$7.32m of debt, at September 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$25.0m in cash, so it actually has US$17.7m net cash.

A Look At SRAX's Liabilities

According to the last reported balance sheet, SRAX had liabilities of US$26.5m due within 12 months, and liabilities of US$279.0k due beyond 12 months. On the other hand, it had cash of US$25.0m and US$1.38m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to SRAX's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$113.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, SRAX boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SRAX can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, SRAX reported revenue of US$26m, which is a gain of 398%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is SRAX?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months SRAX lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$23m and booked a US$20m accounting loss. With only US$17.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, SRAX'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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for SRAX (2 can't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.