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

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 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 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

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

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

The image below, which you can click on for greater detail, shows that at March 2023 B.O.S. Better Online Solutions had debt of US$1.78m, up from US$1.18m in one year. But it also has US$2.29m in cash to offset that, meaning it has US$512.0k net cash.

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

Zooming in on the latest balance sheet data, we can see that B.O.S. Better Online Solutions had liabilities of US$11.4m due within 12 months and liabilities of US$2.93m due beyond that. Offsetting these obligations, it had cash of US$2.29m as well as receivables valued at US$12.2m due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that B.O.S. Better Online Solutions' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$20.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Notably, B.O.S. Better Online Solutions's EBIT launched higher than Elon Musk, gaining a whopping 193% on last year. There's no doubt that we learn most about debt from the balance sheet. 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 three years, B.O.S. Better Online Solutions burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case B.O.S. Better Online Solutions has US$512.0k in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 193% over the last year. So we are not troubled with B.O.S. Better Online Solutions's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - B.O.S. Better Online Solutions has 1 warning sign we think you should be aware of.

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.