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 Asure Software, Inc. (NASDAQ:ASUR) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Asure Software's Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Asure Software had debt of US$120.7m, up from US$113.8m in one year. However, it does have US$14.7m in cash offsetting this, leading to net debt of about US$106.0m.
How Healthy Is Asure Software's Balance Sheet?
According to the last reported balance sheet, Asure Software had liabilities of US$137.8m due within 12 months, and liabilities of US$122.3m due beyond 12 months. Offsetting these obligations, it had cash of US$14.7m as well as receivables valued at US$15.6m due within 12 months. So it has liabilities totalling US$229.8m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the US$106.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we'd watch its balance sheet closely, without a doubt At the end of the day, Asure Software would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Asure Software can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Asure Software wasn't profitable at an EBIT level, but managed to grow its revenue by38%, to US$99m. With any luck the company will be able to grow its way to profitability.
Despite the top line growth, Asure Software still had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost US$5.6m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$5.9m in negative free cash flow over the last year. That means it's on the risky side of things. For riskier companies like Asure Software 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.
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.
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