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Is Forward Industries (NASDAQ:FORD) Using Too Much Debt?

Simply Wall St

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 Forward Industries, Inc. (NASDAQ:FORD) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Forward Industries

What Is Forward Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2019 Forward Industries had US$2.78m of debt, an increase on US$2.54m, over one year. However, it does have US$2.71m in cash offsetting this, leading to net debt of about US$69.8k.

NasdaqCM:FORD Historical Debt, October 18th 2019

How Strong Is Forward Industries's Balance Sheet?

We can see from the most recent balance sheet that Forward Industries had liabilities of US$7.44m falling due within a year, and liabilities of US$411.6k due beyond that. On the other hand, it had cash of US$2.71m and US$8.46m worth of receivables due within a year. So it actually has US$3.32m more liquid assets than total liabilities.

This surplus liquidity suggests that Forward Industries's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. But either way, Forward Industries has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Forward Industries's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Forward Industries reported revenue of US$38m, which is a gain of 21%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly savour Forward Industries's tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. Indeed, it lost a very considerable US$1.1m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. For riskier companies like Forward Industries 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.