PowerFleet (NASDAQ:PWFL) Is Making Moderate Use Of Debt

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 should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for PowerFleet

How Much Debt Does PowerFleet Carry?

As you can see below, PowerFleet had US$21.7m of debt at December 2022, down from US$24.2m a year prior. However, it does have US$17.7m in cash offsetting this, leading to net debt of about US$4.04m.

How Strong Is PowerFleet's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PowerFleet had liabilities of US$45.7m due within 12 months and liabilities of US$31.3m due beyond that. Offsetting these obligations, it had cash of US$17.7m as well as receivables valued at US$32.5m due within 12 months. So it has liabilities totalling US$26.9m more than its cash and near-term receivables, combined.

PowerFleet has a market capitalization of US$108.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year PowerFleet wasn't profitable at an EBIT level, but managed to grow its revenue by 7.1%, to US$135m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months PowerFleet produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$7.8m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$5.0m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. For riskier companies like PowerFleet I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.