Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Everspin Technologies, Inc. (NASDAQ:MRAM) does use debt in its business. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Everspin Technologies's Debt?
As you can see below, Everspin Technologies had US$9.62m of debt at June 2019, down from US$11.4m a year prior. But on the other hand it also has US$15.3m in cash, leading to a US$5.65m net cash position.
How Healthy Is Everspin Technologies's Balance Sheet?
We can see from the most recent balance sheet that Everspin Technologies had liabilities of US$13.5m falling due within a year, and liabilities of US$5.37m due beyond that. Offsetting this, it had US$15.3m in cash and US$5.86m in receivables that were due within 12 months. So it actually has US$2.31m more liquid assets than total liabilities.
This surplus suggests that Everspin Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Everspin Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Everspin Technologies 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.
In the last year Everspin Technologies actually shrunk its revenue by 5.1%, to US$42m. We would much prefer see growth.
So How Risky Is Everspin Technologies?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Everspin Technologies had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$17m and booked a US$17m accounting loss. With only US$15m on the balance sheet, it would appear that its going to need to raise capital again 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. For riskier companies like Everspin Technologies 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.
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.
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