Does ServiceSource International (NASDAQ: SREV) use debt wisely?
Howard Marks put it right when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk that concerns me … and every investor I practice. know worries. It is natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We can see that ServiceSource International, Inc. (NASDAQ: SREV) uses debt in its business. But the most important question is: what is the risk that this debt creates?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a business cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to issue shares at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.
What is ServiceSource International’s net debt?
You can click on the graph below for historical numbers, but it shows that ServiceSource International had $ 15.0 million in debt in March 2021, up from $ 27.0 million a year earlier. But on the other hand, it also has US $ 34.2 million in cash, which leads to a net cash position of US $ 19.2 million.
NasdaqGS: history of SREV debt to equity May 8, 2021
How strong is ServiceSource International’s balance sheet?
According to the latest published balance sheet, ServiceSource International had liabilities of US $ 49.4 million due within 12 months and liabilities of US $ 26.0 million beyond 12 months. In return for these obligations, he had cash of US $ 34.2 million as well as receivables valued at US $ 34.6 million due within 12 months. It therefore has liabilities totaling $ 6.68 million more than its cash and short-term receivables combined.
Of course, ServiceSource International has a market capitalization of US $ 140.2 million, so these commitments are likely manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. Despite its notable responsibilities, ServiceSource International has a clean cash flow, so it’s fair to say that it doesn’t have heavy debt! There is no doubt that we learn the most about debt from the balance sheet. But you cannot view the debt in total isolation; since ServiceSource International will need revenue to service this debt. So when you consider debt, it’s really worth looking at the profit trend. Click here for an interactive snapshot.
Year over year, ServiceSource International recorded a loss in EBIT and saw revenue drop to $ 190 million, a decrease of 10%. We would much prefer to see the growth.
So how risky is ServiceSource International?
We are convinced that loss-making companies are, in general, riskier than profitable companies. And the point is, over the past twelve months, ServiceSource International has lost money in earnings before interest and taxes (EBIT). And during the same period, it recorded a negative free cash outflow of US $ 710K and a book loss of US $ 21M. While this makes the business a bit risky, it’s important to remember that it has a net cash position of US $ 19.2 million. This means that he could continue to spend at his current rate for more than two years. Overall, we would say the stock is a bit risky, and we’re generally very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 2 warning signs for ServiceSource International you have to be aware of it.
If you want to invest in companies that can generate profits without the burden of debt, take a look at this free list of growing companies that have net cash on the balance sheet.
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