Yahoo Finance Is 5G Networks (ASX:5GN) Using Too Much Debt?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, 5G Networks Limited (ASX:5GN) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for 5G Networks
What Is 5G Networks's Net Debt?
As you can see below, at the end of June 2019, 5G Networks had AU$6.92m of debt, up from AU$347.1k a year ago. Click the image for more detail. However, it also had AU$6.66m in cash, and so its net debt is AU$262.0k.
A Look At 5G Networks's Liabilities
The latest balance sheet data shows that 5G Networks had liabilities of AU$11.2m due within a year, and liabilities of AU$18.2m falling due after that. Offsetting this, it had AU$6.66m in cash and AU$4.61m in receivables that were due within 12 months. So its liabilities total AU$18.1m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because 5G Networks is worth AU$66.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Carrying virtually no net debt, 5G Networks has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is 5G Networks's earnings that will influence how the balance sheet holds up in the future. 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.
Over 12 months, 5G Networks reported revenue of AU$51m, which is a gain of 847%. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
Caveat Emptor
Even though 5G Networks managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at AU$2.3m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 AU$260k of cash over the last year. So to be blunt we think it is risky. For riskier companies like 5G Networks I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
