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Is RealNetworks (NASDAQ:RNWK) A Risky Investment?

Simply Wall St

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 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. Importantly, RealNetworks, Inc. (NASDAQ:RNWK) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for RealNetworks

What Is RealNetworks's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2019 RealNetworks had US$7.50m of debt, an increase on none, over one year. But it also has US$18.1m in cash to offset that, meaning it has US$10.6m net cash.

NasdaqGS:RNWK Historical Debt, January 30th 2020

How Strong Is RealNetworks's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that RealNetworks had liabilities of US$107.0m due within 12 months and liabilities of US$25.9m due beyond that. On the other hand, it had cash of US$18.1m and US$27.9m worth of receivables due within a year. So it has liabilities totalling US$86.9m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$55.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, RealNetworks would probably need a major re-capitalization if its creditors were to demand repayment. Given that RealNetworks has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since RealNetworks will need earnings to service that debt. 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.

In the last year RealNetworks wasn't profitable at an EBIT level, but managed to grow its revenue by 102%, to US$145m. So there's no doubt that shareholders are cheering for growth

So How Risky Is RealNetworks?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year RealNetworks had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$25m and booked a US$21m accounting loss. With only US$10.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, RealNetworks's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with RealNetworks (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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 editorial-team@simplywallst.com. 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.