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. As with many other companies CynergisTek, Inc. (NYSEMKT:CTEK) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for CynergisTek
What Is CynergisTek's Net Debt?
As you can see below, at the end of June 2020, CynergisTek had US$3.81m of debt, up from US$1.55m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$5.41m in cash, so it actually has US$1.60m net cash.
How Healthy Is CynergisTek's Balance Sheet?
We can see from the most recent balance sheet that CynergisTek had liabilities of US$5.77m falling due within a year, and liabilities of US$4.50m due beyond that. Offsetting these obligations, it had cash of US$5.41m as well as receivables valued at US$3.74m due within 12 months. So it has liabilities totalling US$1.12m more than its cash and near-term receivables, combined.
Of course, CynergisTek has a market capitalization of US$15.4m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, CynergisTek 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 CynergisTek can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year CynergisTek had a loss before interest and tax, and actually shrunk its revenue by 14%, to US$20m. We would much prefer see growth.
So How Risky Is CynergisTek?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year CynergisTek had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$4.0m and booked a US$7.3m accounting loss. Given it only has net cash of US$1.60m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for CynergisTek that you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.