Yahoo Finance We Think Phunware (NASDAQ:PHUN) Has A Fair Chunk Of Debt
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. 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. Importantly, Phunware, Inc. (NASDAQ:PHUN) does carry debt. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Phunware
What Is Phunware's Net Debt?
As you can see below, Phunware had US$2.03m of debt at June 2019, down from US$2.34m a year prior. However, it does have US$248.0k in cash offsetting this, leading to net debt of about US$1.78m.
How Healthy Is Phunware's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Phunware had liabilities of US$17.5m due within 12 months and liabilities of US$5.38m due beyond that. Offsetting these obligations, it had cash of US$248.0k as well as receivables valued at US$3.55m due within 12 months. So it has liabilities totalling US$19.1m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Phunware has a market capitalization of US$64.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Phunware will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Phunware had negative earnings before interest and tax, and actually shrunk its revenue by 29%, to US$23m. To be frank that doesn't bode well.
Caveat Emptor
Not only did Phunware's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$11m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$6.4m of cash over the last year. So in short it's a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Phunware insider transactions.
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.
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