B.O.S. Better Online Solutions (NASDAQ:BOSC) Has A Pretty Healthy Balance Sheet

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 B.O.S. Better Online Solutions Ltd. (NASDAQ:BOSC) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for B.O.S. Better Online Solutions

How Much Debt Does B.O.S. Better Online Solutions Carry?

You can click the graphic below for the historical numbers, but it shows that B.O.S. Better Online Solutions had US$1.74m of debt in June 2021, down from US$2.96m, one year before. But on the other hand it also has US$1.93m in cash, leading to a US$191.0k net cash position.

How Healthy Is B.O.S. Better Online Solutions' Balance Sheet?

According to the last reported balance sheet, B.O.S. Better Online Solutions had liabilities of US$8.69m due within 12 months, and liabilities of US$2.05m due beyond 12 months. On the other hand, it had cash of US$1.93m and US$11.1m worth of receivables due within a year. So it actually has US$2.30m more liquid assets than total liabilities.

This surplus suggests that B.O.S. Better Online Solutions has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that B.O.S. Better Online Solutions has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that B.O.S. Better Online Solutions improved its EBIT from a last year's loss to a positive US$960k. When analysing debt levels, the balance sheet is the obvious place to start. But it is B.O.S. Better Online Solutions's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. B.O.S. Better Online Solutions may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, B.O.S. Better Online Solutions produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that B.O.S. Better Online Solutions has net cash of US$191.0k, as well as more liquid assets than liabilities. So we are not troubled with B.O.S. Better Online Solutions's debt use. 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. For example B.O.S. Better Online Solutions has 3 warning signs (and 1 which is a bit concerning) we think 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.

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.

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