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.' 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. As with many other companies iCAD, Inc. (NASDAQ:ICAD) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 iCAD Carry?
The image below, which you can click on for greater detail, shows that at June 2019 iCAD had debt of US$16.8m, up from US$6.07m in one year. But on the other hand it also has US$19.6m in cash, leading to a US$2.77m net cash position.
How Healthy Is iCAD's Balance Sheet?
The latest balance sheet data shows that iCAD had liabilities of US$14.9m due within a year, and liabilities of US$14.9m falling due after that. On the other hand, it had cash of US$19.6m and US$6.77m worth of receivables due within a year. So it has liabilities totalling US$3.41m more than its cash and near-term receivables, combined.
Given iCAD has a market capitalization of US$109.1m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, iCAD also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if iCAD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, iCAD saw its revenue hold pretty steady. While that's not too bad, we'd prefer see growth.
So How Risky Is iCAD?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that iCAD had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$5.2m and booked a US$12m accounting loss. But the saving grace is the US$20m on the balance sheet. That kitty means the company can keep spending for growth for at least three years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. For riskier companies like iCAD 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.
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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