Does Socket Mobile (NASDAQ:SCKT) Have A Healthy Balance Sheet?

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.' 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 Socket Mobile, Inc. (NASDAQ:SCKT) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Socket Mobile

How Much Debt Does Socket Mobile Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Socket Mobile had US$2.98m of debt, an increase on US$1.74m, over one year. But it also has US$3.43m in cash to offset that, meaning it has US$453.6k net cash.

How Healthy Is Socket Mobile's Balance Sheet?

We can see from the most recent balance sheet that Socket Mobile had liabilities of US$6.84m falling due within a year, and liabilities of US$3.07m due beyond that. Offsetting this, it had US$3.43m in cash and US$3.20m in receivables that were due within 12 months. So it has liabilities totalling US$3.28m more than its cash and near-term receivables, combined.

Socket Mobile has a market capitalization of US$6.79m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Socket Mobile also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Socket Mobile will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Socket Mobile made a loss at the EBIT level, and saw its revenue drop to US$18m, which is a fall of 26%. That makes us nervous, to say the least.

So How Risky Is Socket Mobile?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Socket Mobile had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$3.0m and booked a US$1.6m accounting loss. Given it only has net cash of US$453.6k, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Socket Mobile you should be aware of, and 1 of them is a bit concerning.

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.