The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that QuickLogic Corporation (NASDAQ:QUIK) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
How Much Debt Does QuickLogic Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 QuickLogic had US$15.0m of debt, an increase on US$9.00m, over one year. But it also has US$24.7m in cash to offset that, meaning it has US$9.72m net cash.
How Strong Is QuickLogic's Balance Sheet?
We can see from the most recent balance sheet that QuickLogic had liabilities of US$18.1m falling due within a year, and liabilities of US$1.42m due beyond that. Offsetting this, it had US$24.7m in cash and US$1.26m in receivables that were due within 12 months. So it actually has US$6.42m more liquid assets than total liabilities.
This short term liquidity is a sign that QuickLogic could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, QuickLogic 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 QuickLogic'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 QuickLogic had negative earnings before interest and tax, and actually shrunk its revenue by 14%, to US$11m. We would much prefer see growth.
So How Risky Is QuickLogic?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year QuickLogic had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$13m of cash and made a loss of US$15m. But at least it has US$9.72m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 4 warning signs for QuickLogic that you should be aware of before investing here.
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.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.