Is SoundThinking (NASDAQ:SSTI) Using Debt Sensibly?

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. As with many other companies SoundThinking, Inc. (NASDAQ:SSTI) makes use of debt. But the more important question is: how much risk is that debt creating?

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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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does SoundThinking Carry?

As you can see below, SoundThinking had US$4.00m of debt at December 2024, down from US$7.00m a year prior. But it also has US$13.8m in cash to offset that, meaning it has US$9.76m net cash.

How Healthy Is SoundThinking's Balance Sheet?

The latest balance sheet data shows that SoundThinking had liabilities of US$56.1m due within a year, and liabilities of US$8.34m falling due after that. Offsetting this, it had US$13.8m in cash and US$25.5m in receivables that were due within 12 months. So its liabilities total US$25.2m more than the combination of its cash and short-term receivables.

Given SoundThinking has a market capitalization of US$201.0m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, SoundThinking 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 ultimately the future profitability of the business will decide if SoundThinking can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

View our latest analysis for SoundThinking

In the last year SoundThinking wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to US$102m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is SoundThinking?

While SoundThinking lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$16m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. 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. For instance, we've identified 1 warning sign for SoundThinking that you should be aware of.

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.