We Think Socket Mobile (NASDAQ:SCKT) Has A Fair Chunk 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.' 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. 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?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Socket Mobile

How Much Debt Does Socket Mobile Carry?

The chart below, which you can click on for greater detail, shows that Socket Mobile had US$2.99m in debt in June 2024; about the same as the year before. However, it also had US$2.12m in cash, and so its net debt is US$872.0k.

How Strong Is Socket Mobile's Balance Sheet?

The latest balance sheet data shows that Socket Mobile had liabilities of US$6.12m due within a year, and liabilities of US$3.10m falling due after that. Offsetting these obligations, it had cash of US$2.12m as well as receivables valued at US$2.55m due within 12 months. So it has liabilities totalling US$4.55m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$7.55m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. 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 3.6%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Socket Mobile produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$2.9m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$1.9m of cash over the last year. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Socket Mobile (of which 2 are concerning!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com