The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Boxlight Corporation (NASDAQ:BOXL) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Boxlight's Debt?
As you can see below, at the end of June 2019, Boxlight had US$6.58m of debt, up from US$2.34m a year ago. Click the image for more detail. However, because it has a cash reserve of US$945.4k, its net debt is less, at about US$5.63m.
How Healthy Is Boxlight's Balance Sheet?
The latest balance sheet data shows that Boxlight had liabilities of US$18.1m due within a year, and liabilities of US$2.39m falling due after that. On the other hand, it had cash of US$945.4k and US$7.39m worth of receivables due within a year. So it has liabilities totalling US$12.2m more than its cash and near-term receivables, combined.
Boxlight has a market capitalization of US$26.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Boxlight'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.
In the last year Boxlight managed to grow its revenue by 23%, to US$38m. With any luck the company will be able to grow its way to profitability.
Despite the top line growth, Boxlight still had negative earnings before interest and tax (EBIT), over the last year. Its EBIT loss was a whopping US$6.4m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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$1.2m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. For riskier companies like Boxlight I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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