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We Think B.O.S. Better Online Solutions (NASDAQ:BOSC) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, B.O.S. Better Online Solutions Ltd. (NASDAQ:BOSC) does carry debt. But the more important question is: how much risk is that debt creating?

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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for B.O.S. Better Online Solutions

What Is B.O.S. Better Online Solutions's Net Debt?

The image below, which you can click on for greater detail, shows that B.O.S. Better Online Solutions had debt of US$1.58m at the end of September 2021, a reduction from US$2.63m over a year. However, it does have US$2.00m in cash offsetting this, leading to net cash of US$421.0k.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is B.O.S. Better Online Solutions' Balance Sheet?

According to the last reported balance sheet, B.O.S. Better Online Solutions had liabilities of US$8.23m due within 12 months, and liabilities of US$1.91m due beyond 12 months. On the other hand, it had cash of US$2.00m and US$10.1m worth of receivables due within a year. So it actually has US$1.94m more liquid assets than total liabilities.

This surplus suggests that B.O.S. Better Online Solutions has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, B.O.S. Better Online Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, B.O.S. Better Online Solutions's EBIT launched higher than Elon Musk, gaining a whopping 178% on last year. 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 B.O.S. Better Online Solutions 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. B.O.S. Better Online Solutions may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, B.O.S. Better Online Solutions actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that B.O.S. Better Online Solutions has net cash of US$421.0k, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 178% over the last year. So we don't have any problem with B.O.S. Better Online Solutions's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for B.O.S. Better Online Solutions (of which 1 is a bit concerning!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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