David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Marin Software Incorporated (NASDAQ:MRIN) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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, 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.
How Much Debt Does Marin Software Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 Marin Software had US$3.32m of debt, an increase on none, over one year. However, it does have US$14.7m in cash offsetting this, leading to net cash of US$11.4m.
How Strong Is Marin Software's Balance Sheet?
The latest balance sheet data shows that Marin Software had liabilities of US$12.8m due within a year, and liabilities of US$4.06m falling due after that. On the other hand, it had cash of US$14.7m and US$4.48m worth of receivables due within a year. So it can boast US$2.27m more liquid assets than total liabilities.
This short term liquidity is a sign that Marin Software could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Marin Software has more cash than debt is arguably a good indication that 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 Marin Software will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Marin Software had a loss before interest and tax, and actually shrunk its revenue by 38%, to US$28m. To be frank that doesn't bode well.
So How Risky Is Marin Software?
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 Marin Software had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$7.9m and booked a US$12m accounting loss. However, it has net cash of US$11.4m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should learn about the 3 warning signs we've spotted with Marin Software (including 1 which can't be ignored) .
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.
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. 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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