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.’ 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. Importantly, BSQUARE Corporation (NASDAQ:BSQR) does carry debt. 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. 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.
What Is BSQUARE’s Net Debt?
As you can see below, at the end of March 2021, BSQUARE had US$1.59m of debt, up from none a year ago. Click the image for more detail. However, it does have US$10.0m in cash offsetting this, leading to net cash of US$8.44m.
A Look At BSQUARE’s Liabilities
According to the last reported balance sheet, BSQUARE had liabilities of US$9.77m due within 12 months, and liabilities of US$1.58m due beyond 12 months. On the other hand, it had cash of US$10.0m and US$5.69m worth of receivables due within a year. So it can boast US$4.37m more liquid assets than total liabilities.
This short term liquidity is a sign that BSQUARE could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that BSQUARE has more cash than debt is arguably a good indication that it can manage its debt safely. There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since BSQUARE will need earnings to service that debt.
Over 12 months, BSQUARE made a loss at the EBIT level, and saw its revenue drop to US$40m, which is a fall of 34%. That makes us nervous, to say the least.
So How Risky Is BSQUARE?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that BSQUARE had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$2.0m of cash and made a loss of US$2.3m. However, it has net cash of US$8.44m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn’t seem overly risky, at the moment, but we’re always cautious until we see the positive free cash flow. 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.