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Socket Mobile (NASDAQ:SCKT) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Socket Mobile, Inc. (NASDAQ:SCKT) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Socket Mobile

What Is Socket Mobile's Debt?

The image below, which you can click on for greater detail, shows that Socket Mobile had debt of US$1.85m at the end of March 2022, a reduction from US$2.32m over a year. However, its balance sheet shows it holds US$5.42m in cash, so it actually has US$3.57m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Socket Mobile's Balance Sheet?

We can see from the most recent balance sheet that Socket Mobile had liabilities of US$5.34m falling due within a year, and liabilities of US$20.7k due beyond that. Offsetting this, it had US$5.42m in cash and US$3.45m in receivables that were due within 12 months. So it can boast US$3.51m more liquid assets than total liabilities.

This excess liquidity suggests that Socket Mobile is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Socket Mobile has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Socket Mobile grew its EBIT by 613% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Socket Mobile 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Socket Mobile has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Socket Mobile recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Socket Mobile has net cash of US$3.57m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 613% over the last year. So is Socket Mobile's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Socket Mobile (2 don't sit too well with us) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.