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. We can see that SoundThinking, Inc. (NASDAQ:SSTI) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for SoundThinking
How Much Debt Does SoundThinking Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2023 SoundThinking had US$7.00m of debt, an increase on none, over one year. However, because it has a cash reserve of US$6.11m, its net debt is less, at about US$891.0k.
How Strong Is SoundThinking's Balance Sheet?
According to the last reported balance sheet, SoundThinking had liabilities of US$59.8m due within 12 months, and liabilities of US$4.13m due beyond 12 months. Offsetting this, it had US$6.11m in cash and US$30.7m in receivables that were due within 12 months. So it has liabilities totalling US$27.1m more than its cash and near-term receivables, combined.
Since publicly traded SoundThinking shares are worth a total of US$184.4m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, SoundThinking has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. 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.
In the last year SoundThinking wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to US$93m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, SoundThinking had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$6.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of US$2.7m. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that SoundThinking is showing 2 warning signs in our investment analysis , you should know about...
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.
About NasdaqCM:SSTI
SoundThinking
A public safety technology company, provides transformative solutions and strategic advisory services for law enforcement and civic leadership.
Good value with adequate balance sheet.