SurgePays (NASDAQ:SURG) Has A Pretty Healthy Balance Sheet

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. As with many other companies SurgePays, Inc. (NASDAQ:SURG) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for SurgePays

What Is SurgePays's Debt?

You can click the graphic below for the historical numbers, but it shows that SurgePays had US$6.79m of debt in March 2023, down from US$7.65m, one year before. But it also has US$8.86m in cash to offset that, meaning it has US$2.07m net cash.

How Healthy Is SurgePays' Balance Sheet?

The latest balance sheet data shows that SurgePays had liabilities of US$25.6m due within a year, and liabilities of US$4.94m falling due after that. Offsetting this, it had US$8.86m in cash and US$9.66m in receivables that were due within 12 months. So its liabilities total US$12.1m more than the combination of its cash and short-term receivables.

Since publicly traded SurgePays shares are worth a total of US$90.6m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, SurgePays boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, SurgePays made a loss at the EBIT level, last year, but improved that to positive EBIT of US$6.4m in the last twelve months. 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 SurgePays's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While SurgePays has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, SurgePays generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

Although SurgePays's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$2.07m. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in US$6.1m. So we don't have any problem with SurgePays's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for SurgePays that you should be aware of.

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.