Is PowerFleet (NASDAQ:PWFL) A Risky Investment?

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.' 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 PowerFleet, Inc. (NASDAQ:PWFL) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for PowerFleet

What Is PowerFleet's Net Debt?

As you can see below, PowerFleet had US$20.0m of debt at March 2023, down from US$22.3m a year prior. However, its balance sheet shows it holds US$24.8m in cash, so it actually has US$4.78m net cash.

How Healthy Is PowerFleet's Balance Sheet?

According to the last reported balance sheet, PowerFleet had liabilities of US$45.8m due within 12 months, and liabilities of US$29.7m due beyond 12 months. Offsetting these obligations, it had cash of US$24.8m as well as receivables valued at US$33.7m due within 12 months. So it has liabilities totalling US$17.1m more than its cash and near-term receivables, combined.

Given PowerFleet has a market capitalization of US$102.2m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, PowerFleet also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 PowerFleet'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.

Over 12 months, PowerFleet reported revenue of US$135m, which is a gain of 3.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is PowerFleet?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that PowerFleet had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$2.3m of cash and made a loss of US$3.9m. While this does make the company a bit risky, it's important to remember it has net cash of US$4.78m. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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, we've discovered 2 warning signs for PowerFleet that you should be aware of before investing here.

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.