Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Zoomd Technologies Ltd. (CVE:ZOMD) makes use of debt. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
You can click the graphic below for the historical numbers, but it shows that as of June 2023 Zoomd Technologies had US$2.00m of debt, an increase on US$1.00m, over one year. However, it does have US$2.04m in cash offsetting this, leading to net cash of US$37.0k.
Zooming in on the latest balance sheet data, we can see that Zoomd Technologies had liabilities of US$8.69m due within 12 months and liabilities of US$2.41m due beyond that. Offsetting this, it had US$2.04m in cash and US$6.37m in receivables that were due within 12 months. So it has liabilities totalling US$2.69m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Zoomd Technologies has a market capitalization of US$8.73m, 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, Zoomd Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zoomd Technologies 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.
Over 12 months, Zoomd Technologies made a loss at the EBIT level, and saw its revenue drop to US$38m, which is a fall of 43%. That makes us nervous, to say the least.
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Zoomd Technologies lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$3.2m of cash and made a loss of US$8.0m. But at least it has US$37.0k on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Case in point: We've spotted 3 warning signs for Zoomd Technologies you should be aware of.
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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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.