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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Siyata Mobile Inc. (CVE:SIM) does carry debt. But the more important question is: how much risk is that debt creating?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Siyata Mobile's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Siyata Mobile had CA$4.23m of debt, an increase on CA$3.63m, over one year. But on the other hand it also has CA$5.16m in cash, leading to a CA$927.0k net cash position.
How Healthy Is Siyata Mobile's Balance Sheet?
We can see from the most recent balance sheet that Siyata Mobile had liabilities of CA$3.73m falling due within a year, and liabilities of CA$4.18m due beyond that. On the other hand, it had cash of CA$5.16m and CA$951.2k worth of receivables due within a year. So its liabilities total CA$1.81m more than the combination of its cash and short-term receivables.
Since publicly traded Siyata Mobile shares are worth a total of CA$53.4m, it seems unlikely that this level of liabilities would be a major threat. 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, Siyata Mobile 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 ultimately the future profitability of the business will decide if Siyata Mobile can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Siyata Mobile actually shrunk its revenue by 10%, to CA$14m. That's not what we would hope to see.
So How Risky Is Siyata Mobile?
We have no doubt that loss making companies are, in general, riskier than profitable ones. Anf the fact is that over the last twelve months Siyata Mobile lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$5.1m of cash and made a loss of CA$13m. However, it has net cash of CA$5.2m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like Siyata Mobile I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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