Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. 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 note that Qumu Corporation (NASDAQ:QUMU) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Qumu's Net Debt?
The image below, which you can click on for greater detail, shows that Qumu had debt of US$3.89m at the end of June 2019, a reduction from US$8.18m over a year. But on the other hand it also has US$7.35m in cash, leading to a US$3.46m net cash position.
A Look At Qumu's Liabilities
We can see from the most recent balance sheet that Qumu had liabilities of US$20.7m falling due within a year, and liabilities of US$3.03m due beyond that. On the other hand, it had cash of US$7.35m and US$4.82m worth of receivables due within a year. So its liabilities total US$11.6m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Qumu has a market capitalization of US$32.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Qumu also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Qumu's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Qumu made a loss at the EBIT level, and saw its revenue drop to US$25m, which is a fall of 8.2%. We would much prefer see growth.
So How Risky Is Qumu?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Qumu 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$1.2m and booked a US$2.1m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$3.46m. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Qumu's profit, revenue, and operating cashflow have changed over the last few years.
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.
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