Is SoundThinking (NASDAQ:SSTI) Weighed On By Its Debt Load?

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. As with many other companies SoundThinking, Inc. (NASDAQ:SSTI) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SoundThinking

What Is SoundThinking's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 SoundThinking had US$7.00m of debt, an increase on none, over one year. But on the other hand it also has US$8.99m in cash, leading to a US$1.99m net cash position.

A Look At SoundThinking's Liabilities

The latest balance sheet data shows that SoundThinking had liabilities of US$61.2m due within a year, and liabilities of US$9.04m falling due after that. On the other hand, it had cash of US$8.99m and US$35.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$26.0m.

Of course, SoundThinking has a market capitalization of US$185.4m, so these liabilities are probably manageable. 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, SoundThinking also has more cash than debt, so we're pretty confident it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year SoundThinking wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to US$98m. With any luck the company will be able to grow its way to profitability.

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$11m. 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. One positive is that SoundThinking is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. 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. Case in point: We've spotted 3 warning signs for SoundThinking you should be aware of.

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. 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.

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