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. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that MoSys, Inc. (NASDAQ:MOSY) does use debt in its business. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does MoSys Carry?
As you can see below, at the end of September 2019, MoSys had US$2.86m of debt, up from US$10.0 a year ago. Click the image for more detail. But it also has US$6.82m in cash to offset that, meaning it has US$3.96m net cash.
How Strong Is MoSys's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that MoSys had liabilities of US$1.72m due within 12 months and liabilities of US$2.88m due beyond that. On the other hand, it had cash of US$6.82m and US$893.0k worth of receivables due within a year. So it can boast US$3.11m more liquid assets than total liabilities.
This surplus strongly suggests that MoSys has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that MoSys has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is MoSys'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, MoSys made a loss at the EBIT level, and saw its revenue drop to US$11m, which is a fall of 34%. To be frank that doesn't bode well.
So How Risky Is MoSys?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months MoSys lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$369k and booked a US$11m accounting loss. But the saving grace is the US$3.96m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for MoSys (2 are a bit unpleasant!) that you should be aware of before investing here.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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