Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Crossword Cybersecurity Plc (LON:CCS) does use debt in its business. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Crossword Cybersecurity's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2019 Crossword Cybersecurity had UK£1.31m of debt, an increase on none, over one year. But on the other hand it also has UK£1.51m in cash, leading to a UK£206.9k net cash position.
How Healthy Is Crossword Cybersecurity's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Crossword Cybersecurity had liabilities of UK£613.3k due within 12 months and liabilities of UK£1.31m due beyond that. Offsetting this, it had UK£1.51m in cash and UK£626.3k in receivables that were due within 12 months. So it can boast UK£219.9k more liquid assets than total liabilities.
This state of affairs indicates that Crossword Cybersecurity's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the UK£15.4m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Crossword Cybersecurity boasts net cash, 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 future earnings, more than anything, that will determine Crossword Cybersecurity'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.
In the last year Crossword Cybersecurity wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to UK£1.3m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Crossword Cybersecurity?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Crossword Cybersecurity lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through UK£1.8m of cash and made a loss of UK£2.1m. With only UK£206.9k on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Crossword Cybersecurity may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 6 warning signs for Crossword Cybersecurity (1 shouldn't be ignored) you should be aware of.
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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