Yahoo Finance Is Crossword Cybersecurity (LON:CCS) Using Too Much Debt?
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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Crossword Cybersecurity Plc (LON:CCS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Crossword Cybersecurity
What Is Crossword Cybersecurity's Debt?
The image below, which you can click on for greater detail, shows that at June 2020 Crossword Cybersecurity had debt of UK£1.32m, up from none in one year. However, it does have UK£1.55m in cash offsetting this, leading to net cash of UK£229.0k.
How Strong Is Crossword Cybersecurity's Balance Sheet?
The latest balance sheet data shows that Crossword Cybersecurity had liabilities of UK£713.4k due within a year, and liabilities of UK£1.32m falling due after that. On the other hand, it had cash of UK£1.55m and UK£450.2k worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to Crossword Cybersecurity's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the UK£13.6m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Crossword Cybersecurity boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Crossword Cybersecurity 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.
Over 12 months, Crossword Cybersecurity reported revenue of UK£1.4m, which is a gain of 29%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Crossword Cybersecurity?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Crossword Cybersecurity lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of UK£1.9m and booked a UK£2.5m accounting loss. With only UK£229.0k on the balance sheet, it would appear that its going to need to raise capital again soon. Crossword Cybersecurity's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 5 warning signs for Crossword Cybersecurity (2 can't be ignored) you should be aware of.
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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