Is CalAmp (NASDAQ:CAMP) Weighed On By Its Debt Load?

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. As with many other companies CalAmp Corp. (NASDAQ:CAMP) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CalAmp

How Much Debt Does CalAmp Carry?

The image below, which you can click on for greater detail, shows that at November 2022 CalAmp had debt of US$228.4m, up from US$190.6m in one year. On the flip side, it has US$44.9m in cash leading to net debt of about US$183.5m.

A Look At CalAmp's Liabilities

According to the last reported balance sheet, CalAmp had liabilities of US$108.5m due within 12 months, and liabilities of US$261.8m due beyond 12 months. On the other hand, it had cash of US$44.9m and US$87.7m worth of receivables due within a year. So its liabilities total US$237.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$147.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, CalAmp would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CalAmp can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year CalAmp had a loss before interest and tax, and actually shrunk its revenue by 7.9%, to US$285m. That's not what we would hope to see.

Caveat Emptor

Importantly, CalAmp had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$21m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$42m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for CalAmp you should be aware of, and 1 of them doesn't sit too well with us.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.