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.’ 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. We note that Phunware, Inc. (NASDAQ:PHUN) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Phunware Carry?
The image below, which you can click on for greater detail, shows that at September 2022 Phunware had debt of US$12.7m, up from US$1.13m in one year. However, because it has a cash reserve of US$8.54m, its net debt is less, at about US$4.15m.
How Healthy Is Phunware’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Phunware had liabilities of US$29.9m due within 12 months and liabilities of US$5.75m due beyond that. Offsetting this, it had US$8.54m in cash and US$1.71m in receivables that were due within 12 months. So its liabilities total US$25.4m more than the combination of its cash and short-term receivables.
Given Phunware has a market capitalization of US$137.7m, it’s hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Phunware can strengthen its balance sheet over time.
Over 12 months, Phunware reported revenue of US$22m, which is a gain of 209%, although it did not report any earnings before interest and tax. That’s virtually the hole-in-one of revenue growth!
Caveat Emptor
While we can certainly appreciate Phunware’s revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping US$26m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$27m in negative free cash flow over the last twelve months. So in short it’s a really risky stock.