Forrester Research (NASDAQ:FORR) Has A Rock Solid 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. We note that Forrester Research, Inc. (NASDAQ:FORR) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Forrester Research
What Is Forrester Research's Debt?
As you can see below, Forrester Research had US$99.4m of debt at September 2021, down from US$111.4m a year prior. However, it does have US$146.4m in cash offsetting this, leading to net cash of US$47.0m.
A Look At Forrester Research's Liabilities
Zooming in on the latest balance sheet data, we can see that Forrester Research had liabilities of US$276.8m due within 12 months and liabilities of US$176.8m due beyond that. Offsetting this, it had US$146.4m in cash and US$52.3m in receivables that were due within 12 months. So it has liabilities totalling US$255.0m more than its cash and near-term receivables, combined.
Forrester Research has a market capitalization of US$1.13b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Forrester Research also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Forrester Research has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Forrester Research'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. Forrester Research 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. Over the last three years, Forrester Research actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
Although Forrester Research's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$47.0m. The cherry on top was that in converted 218% of that EBIT to free cash flow, bringing in US$92m. So is Forrester Research's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Forrester Research , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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