Is Corero Network Security (LON:CNS) Using Debt Sensibly?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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, Corero Network Security plc (LON:CNS) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Corero Network Security
What Is Corero Network Security's Net Debt?
As you can see below, Corero Network Security had US$2.94m of debt at December 2019, down from US$3.61m a year prior. But on the other hand it also has US$8.32m in cash, leading to a US$5.38m net cash position.
How Healthy Is Corero Network Security's Balance Sheet?
According to the last reported balance sheet, Corero Network Security had liabilities of US$6.07m due within 12 months, and liabilities of US$3.28m due beyond 12 months. Offsetting this, it had US$8.32m in cash and US$2.57m in receivables that were due within 12 months. So it can boast US$1.54m more liquid assets than total liabilities.
This surplus suggests that Corero Network Security has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Corero Network Security 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 ultimately the future profitability of the business will decide if Corero Network Security can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Corero Network Security had negative earnings before interest and tax, and actually shrunk its revenue by 2.4%, to US$9.7m. We would much prefer see growth.
So How Risky Is Corero Network Security?
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 Corero Network Security had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$2.5m and booked a US$6.6m accounting loss. But the saving grace is the US$5.38m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. 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. For example, we've discovered 4 warning signs for Corero Network Security that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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.
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