Is FARO Technologies (NASDAQ:FARO) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 FARO Technologies, Inc. (NASDAQ:FARO) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for FARO Technologies

What Is FARO Technologies's Debt?

As you can see below, at the end of June 2023, FARO Technologies had US$72.5m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$88.5m in cash, so it actually has US$16.0m net cash.

A Look At FARO Technologies' Liabilities

According to the last reported balance sheet, FARO Technologies had liabilities of US$107.8m due within 12 months, and liabilities of US$123.2m due beyond 12 months. On the other hand, it had cash of US$88.5m and US$88.3m worth of receivables due within a year. So its liabilities total US$54.2m more than the combination of its cash and short-term receivables.

Of course, FARO Technologies has a market capitalization of US$366.9m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, FARO Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine FARO Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year FARO Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 7.9%, to US$362m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is FARO Technologies?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that FARO Technologies had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$51m of cash and made a loss of US$58m. Given it only has net cash of US$16.0m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 instance, we've identified 3 warning signs for FARO Technologies (1 shouldn't be ignored) you should be aware of.

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.