Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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. As with many other companies SharpSpring, Inc. (NASDAQ:SHSP) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own 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. 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.

What Is SharpSpring’s Net Debt?

The image below, which you can click on for greater detail, shows that at March 2021 SharpSpring had debt of US$5.13m, up from US$1.90m in one year. However, its balance sheet shows it holds US$26.9m in cash, so it actually has US$21.7m net cash.

A Look At SharpSpring’s Liabilities

Zooming in on the latest balance sheet data, we can see that SharpSpring had liabilities of US$9.24m due within 12 months and liabilities of US$7.75m due beyond that. On the other hand, it had cash of US$26.9m and US$1.69m worth of receivables due within a year. So it can boast US$11.5m more liquid assets than total liabilities.

This surplus suggests that SharpSpring has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, SharpSpring 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 it is future earnings, more than anything, that will determine SharpSpring’s ability to maintain a healthy balance sheet going forward.

Over 12 months, SharpSpring reported revenue of US$30m, which is a gain of 24%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is SharpSpring?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that SharpSpring had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$3.4m of cash and made a loss of US$7.4m. But at least it has US$21.7m on the balance sheet to spend on growth, near-term. SharpSpring’s revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt.