The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Finzsoft Solutions Limited (NZSE:FIN) does carry debt. But is this debt a concern to shareholders?
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Finzsoft Solutions
What Is Finzsoft Solutions's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Finzsoft Solutions had NZ$1.70m of debt, an increase on NZ$1.10m, over one year. On the flip side, it has NZ$1.25m in cash leading to net debt of about NZ$447.7k.
How Healthy Is Finzsoft Solutions's Balance Sheet?
The latest balance sheet data shows that Finzsoft Solutions had liabilities of NZ$6.05m due within a year, and liabilities of NZ$1.55m falling due after that. Offsetting these obligations, it had cash of NZ$1.25m as well as receivables valued at NZ$1.06m due within 12 months. So its liabilities total NZ$5.29m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of NZ$8.81m, so it does suggest shareholders should keep an eye on Finzsoft Solutions's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Finzsoft Solutions 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 Finzsoft Solutions actually shrunk its revenue by 16%, to NZ$12m. We would much prefer see growth.