Is One Stop Systems (NASDAQ:OSS) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies One Stop Systems, Inc. (NASDAQ:OSS) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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.

View our latest analysis for One Stop Systems

What Is One Stop Systems's Debt?

You can click the graphic below for the historical numbers, but it shows that One Stop Systems had US$2.26m of debt in September 2023, down from US$3.25m, one year before. However, its balance sheet shows it holds US$13.2m in cash, so it actually has US$10.9m net cash.

How Strong Is One Stop Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that One Stop Systems had liabilities of US$10.6m due within 12 months and liabilities of US$1.73m due beyond that. Offsetting this, it had US$13.2m in cash and US$8.98m in receivables that were due within 12 months. So it can boast US$9.79m more liquid assets than total liabilities.

It's good to see that One Stop Systems has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, One Stop Systems 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 One Stop Systems's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year One Stop Systems had a loss before interest and tax, and actually shrunk its revenue by 8.3%, to US$66m. We would much prefer see growth.

So How Risky Is One Stop Systems?

While One Stop Systems lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$475k. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 instance, we've identified 4 warning signs for One Stop Systems that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.