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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 Sierra Wireless, Inc. (TSE:SW) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Sierra Wireless's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2022 Sierra Wireless had US$57.4m of debt, an increase on none, over one year. But it also has US$101.8m in cash to offset that, meaning it has US$44.4m net cash.
How Healthy Is Sierra Wireless' Balance Sheet?
The latest balance sheet data shows that Sierra Wireless had liabilities of US$192.4m due within a year, and liabilities of US$118.0m falling due after that. On the other hand, it had cash of US$101.8m and US$88.1m worth of receivables due within a year. So it has liabilities totalling US$120.5m more than its cash and near-term receivables, combined.
Of course, Sierra Wireless has a market capitalization of US$803.6m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Sierra Wireless 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 it is future earnings, more than anything, that will determine Sierra Wireless's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Sierra Wireless wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to US$538m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Sierra Wireless?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Sierra Wireless lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$68m of cash and made a loss of US$74m. But the saving grace is the US$44.4m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. 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 4 warning signs for Sierra Wireless you should know about.
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.
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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.