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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Corero Network Security plc (LON:CNS) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Corero Network Security Carry?
The image below, which you can click on for greater detail, shows that Corero Network Security had debt of US$2.48m at the end of December 2020, a reduction from US$2.94m over a year. However, it does have US$10.1m in cash offsetting this, leading to net cash of US$7.66m.
A Look At Corero Network Security's Liabilities
The latest balance sheet data shows that Corero Network Security had liabilities of US$12.1m due within a year, and liabilities of US$3.68m falling due after that. Offsetting these obligations, it had cash of US$10.1m as well as receivables valued at US$3.71m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.89m.
Since publicly traded Corero Network Security shares are worth a total of US$90.2m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Corero Network Security also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Corero Network Security'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.
Over 12 months, Corero Network Security reported revenue of US$17m, which is a gain of 74%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Corero Network Security?
Although Corero Network Security had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$2.7m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for Corero Network Security shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. 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. We've identified 2 warning signs with Corero Network Security , 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. 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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