These 4 Measures Indicate That B.O.S. Better Online Solutions (NASDAQ:BOSC) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that B.O.S. Better Online Solutions Ltd. (NASDAQ:BOSC) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for B.O.S. Better Online Solutions

What Is B.O.S. Better Online Solutions's Net Debt?

The image below, which you can click on for greater detail, shows that B.O.S. Better Online Solutions had debt of US$1.58m at the end of September 2021, a reduction from US$2.63m over a year. But on the other hand it also has US$2.00m in cash, leading to a US$421.0k net cash position.

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

The latest balance sheet data shows that B.O.S. Better Online Solutions had liabilities of US$8.23m due within a year, and liabilities of US$1.91m falling due after that. Offsetting these obligations, it had cash of US$2.00m as well as receivables valued at US$10.1m due within 12 months. So it actually has US$1.94m more liquid assets than total liabilities.

This surplus suggests that B.O.S. Better Online Solutions is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. 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.

Pleasingly, B.O.S. Better Online Solutions is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 178% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since B.O.S. Better Online Solutions will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While B.O.S. Better Online Solutions has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, B.O.S. Better Online Solutions actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While it is always sensible to investigate a company's debt, in this case B.O.S. Better Online Solutions has US$421.0k in net cash and a decent-looking balance sheet. And we liked the look of last year's 178% year-on-year EBIT growth. So we don't have any problem with B.O.S. Better Online Solutions's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for B.O.S. Better Online Solutions (1 is a bit unpleasant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.