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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that SeaChange International, Inc. (NASDAQ:SEAC) 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. If things get really bad, the lenders can take control of the business. 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. 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.
How Much Debt Does SeaChange International Carry?
As you can see below, at the end of April 2021, SeaChange International had US$2.41m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$21.3m in cash, so it actually has US$18.9m net cash.
How Strong Is SeaChange International's Balance Sheet?
According to the last reported balance sheet, SeaChange International had liabilities of US$13.1m due within 12 months, and liabilities of US$3.61m due beyond 12 months. On the other hand, it had cash of US$21.3m and US$14.7m worth of receivables due within a year. So it actually has US$19.3m more liquid assets than total liabilities.
This luscious liquidity implies that SeaChange International's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, SeaChange International boasts net cash, so it's fair to say it does not have a heavy debt load! 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 SeaChange International can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, SeaChange International made a loss at the EBIT level, and saw its revenue drop to US$20m, which is a fall of 69%. That makes us nervous, to say the least.
So How Risky Is SeaChange International?
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 SeaChange International 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$7.1m and booked a US$19m accounting loss. Given it only has net cash of US$18.9m, the company may need to raise more capital if it doesn't reach break-even soon. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that SeaChange International is showing 3 warning signs in our investment analysis , you should know about...
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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