Warren Buffett famously said, '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. We note that CynergisTek, Inc. (NYSEMKT:CTEK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does CynergisTek Carry?
You can click the graphic below for the historical numbers, but it shows that CynergisTek had US$1.55m of debt in June 2019, down from US$23.5m, one year before. But on the other hand it also has US$10.8m in cash, leading to a US$9.30m net cash position.
How Strong Is CynergisTek's Balance Sheet?
According to the last reported balance sheet, CynergisTek had liabilities of US$8.29m due within 12 months, and liabilities of US$1.25m due beyond 12 months. On the other hand, it had cash of US$10.8m and US$4.81m worth of receivables due within a year. So it actually has US$6.11m more liquid assets than total liabilities.
It's good to see that CynergisTek has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, CynergisTek boasts net cash, so it's fair to say it does not have a heavy debt load!
Notably, CynergisTek's EBIT launched higher than Elon Musk, gaining a whopping 357% on last year. 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 CynergisTek'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. CynergisTek may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, CynergisTek generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
While we empathize with investors who find debt concerning, you should keep in mind that CynergisTek has net cash of US$9.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$3.4m, being 89% of its EBIT. So we don't think CynergisTek's use of debt is risky. Another factor that would give us confidence in CynergisTek would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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