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

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.' 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. We can see that ServiceSource International, Inc. (NASDAQ:SREV) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ServiceSource International

What Is ServiceSource International's Debt?

The image below, which you can click on for greater detail, shows that ServiceSource International had debt of US$15.0m at the end of March 2021, a reduction from US$27.0m over a year. However, its balance sheet shows it holds US$34.2m in cash, so it actually has US$19.2m net cash.

How Strong Is ServiceSource International's Balance Sheet?

We can see from the most recent balance sheet that ServiceSource International had liabilities of US$49.4m falling due within a year, and liabilities of US$26.0m due beyond that. On the other hand, it had cash of US$34.2m and US$34.6m worth of receivables due within a year. So it has liabilities totalling US$6.68m more than its cash and near-term receivables, combined.

Since publicly traded ServiceSource International shares are worth a total of US$148.9m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is ServiceSource International's earnings that will influence how the balance sheet holds up in the future. 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, ServiceSource International made a loss at the EBIT level, and saw its revenue drop to US$190m, which is a fall of 10%. We would much prefer see growth.

So How Risky Is ServiceSource International?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year ServiceSource International had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$710k of cash and made a loss of US$21m. But the saving grace is the US$19.2m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see 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. Be aware that ServiceSource International is showing 2 warning signs in our investment analysis , 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.

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