Does Digimarc (NASDAQ:DMRC) Have A Healthy Balance Sheet?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Digimarc Corporation (NASDAQ:DMRC) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Digimarc
What Is Digimarc's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 Digimarc had US$5.08m of debt, an increase on none, over one year. But on the other hand it also has US$70.5m in cash, leading to a US$65.4m net cash position.
How Healthy Is Digimarc's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Digimarc had liabilities of US$10.8m due within 12 months and liabilities of US$2.61m due beyond that. Offsetting this, it had US$70.5m in cash and US$4.14m in receivables that were due within 12 months. So it can boast US$61.3m more liquid assets than total liabilities.
This surplus suggests that Digimarc has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Digimarc has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Digimarc's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Digimarc reported revenue of US$25m, which is a gain of 4.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Digimarc?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Digimarc had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$22m and booked a US$43m accounting loss. However, it has net cash of US$65.4m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Digimarc that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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