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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 B.O.S. Better Online Solutions Ltd. (NASDAQ:BOSC) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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

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

The image below, which you can click on for greater detail, shows that B.O.S. Better Online Solutions had debt of US$1.96m at the end of September 2023, a reduction from US$2.37m over a year. However, because it has a cash reserve of US$1.18m, its net debt is less, at about US$785.0k.

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$10.8m due within 12 months and liabilities of US$2.53m due beyond that. Offsetting these obligations, it had cash of US$1.18m as well as receivables valued at US$12.4m due within 12 months. So it can boast US$328.0k 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

B.O.S. Better Online Solutions has a low net debt to EBITDA ratio of only 0.25. And its EBIT easily covers its interest expense, being 11.2 times the size. So we're pretty relaxed about its super-conservative use of debt. Better yet, B.O.S. Better Online Solutions grew its EBIT by 112% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Considering the last three years, B.O.S. Better Online Solutions actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

Happily, B.O.S. Better Online Solutions's impressive EBIT growth rate implies it has the upper hand on its debt. But the stark truth is that we are concerned by its conversion of EBIT to free cash flow. When we consider the range of factors above, it looks like B.O.S. Better Online Solutions is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for B.O.S. Better Online Solutions 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.