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. We can see that Casa Systems, Inc. (NASDAQ:CASA) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Casa Systems’s Net Debt?
The chart below, which you can click on for greater detail, shows that Casa Systems had US$275.2m in debt in June 2022; about the same as the year before. However, it also had US$195.8m in cash, and so its net debt is US$79.3m.
How Healthy Is Casa Systems’ Balance Sheet?
The latest balance sheet data shows that Casa Systems had liabilities of US$92.3m due within a year, and liabilities of US$292.1m falling due after that. Offsetting this, it had US$195.8m in cash and US$67.8m in receivables that were due within 12 months. So it has liabilities totalling US$120.8m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Casa Systems has a market capitalization of US$356.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Casa Systems can strengthen its balance sheet over time.
Over 12 months, Casa Systems made a loss at the EBIT level, and saw its revenue drop to US$340m, which is a fall of 20%. That’s not what we would hope to see.
Caveat Emptor
While Casa Systems’s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$34m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$49m into a profit. So to be blunt we do think it is risky.