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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Boku, Inc. (LON:BOKU) makes use of debt. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Boku
How Much Debt Does Boku Carry?
The image below, which you can click on for greater detail, shows that at December 2020 Boku had debt of US$12.3m, up from US$2.10m in one year. However, its balance sheet shows it holds US$62.0m in cash, so it actually has US$49.8m net cash.
A Look At Boku's Liabilities
We can see from the most recent balance sheet that Boku had liabilities of US$139.7m falling due within a year, and liabilities of US$13.6m due beyond that. Offsetting these obligations, it had cash of US$62.0m as well as receivables valued at US$87.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.37m.
This state of affairs indicates that Boku's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$662.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Boku boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Boku turned things around in the last 12 months, delivering and EBIT of US$4.5m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Boku 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.