Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies MoSys, Inc. (NASDAQ:MOSY) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is MoSys's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2020 MoSys had debt of US$3.53m, up from US$2.75m in one year. However, its balance sheet shows it holds US$7.38m in cash, so it actually has US$3.85m net cash.
How Healthy Is MoSys's Balance Sheet?
According to the last reported balance sheet, MoSys had liabilities of US$1.61m due within 12 months, and liabilities of US$3.35m due beyond 12 months. Offsetting this, it had US$7.38m in cash and US$601.0k in receivables that were due within 12 months. So it actually has US$3.01m more liquid assets than total liabilities.
This surplus strongly suggests that MoSys has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that MoSys has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is MoSys's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, MoSys made a loss at the EBIT level, and saw its revenue drop to US$6.7m, which is a fall of 53%. That makes us nervous, to say the least.
So How Risky Is MoSys?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months MoSys lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$2.3m and booked a US$4.9m accounting loss. But the saving grace is the US$3.85m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. 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. Take risks, for example - MoSys has 2 warning signs we think you should be aware of.
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.
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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