Is ServiceSource International (NASDAQ:SREV) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, ServiceSource International, Inc. (NASDAQ:SREV) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 ServiceSource International

What Is ServiceSource International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 ServiceSource International had US$15.0m of debt, an increase on none, over one year. But it also has US$39.2m in cash to offset that, meaning it has US$24.2m net cash.

How Strong Is ServiceSource International's Balance Sheet?

According to the last reported balance sheet, ServiceSource International had liabilities of US$48.0m due within 12 months, and liabilities of US$30.4m due beyond 12 months. On the other hand, it had cash of US$39.2m and US$33.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$5.88m.

Of course, ServiceSource International has a market capitalization of US$170.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, ServiceSource International also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ServiceSource International 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, ServiceSource International made a loss at the EBIT level, and saw its revenue drop to US$198m, which is a fall of 11%. That's not what we would hope to see.

So How Risky Is ServiceSource International?

While ServiceSource International lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$2.1m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for ServiceSource International you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

If you decide to trade ServiceSource International, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.