Is SurgePays (NASDAQ:SURG) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies SurgePays, Inc. (NASDAQ:SURG) makes use of debt. But is this debt a concern to shareholders?

Our free stock report includes 2 warning signs investors should be aware of before investing in SurgePays. Read for free now.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is SurgePays's Net Debt?

As you can see below, SurgePays had US$4.03m of debt at December 2024, down from US$5.05m a year prior. But on the other hand it also has US$11.8m in cash, leading to a US$7.77m net cash position.

A Look At SurgePays' Liabilities

We can see from the most recent balance sheet that SurgePays had liabilities of US$6.06m falling due within a year, and liabilities of US$2.65m due beyond that. Offsetting this, it had US$11.8m in cash and US$3.00m in receivables that were due within 12 months. So it can boast US$6.08m more liquid assets than total liabilities.

This short term liquidity is a sign that SurgePays could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SurgePays 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 ultimately the future profitability of the business will decide if SurgePays can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

See our latest analysis for SurgePays

Over 12 months, SurgePays made a loss at the EBIT level, and saw its revenue drop to US$61m, which is a fall of 56%. That makes us nervous, to say the least.

So How Risky Is SurgePays?

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 SurgePays 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$22m and booked a US$46m accounting loss. With only US$7.77m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. We've identified 2 warning signs with SurgePays (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.