Yahoo Finance Does Elmo Software (ASX:ELO) Have A Healthy Balance Sheet?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Elmo Software Limited (ASX:ELO) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Elmo Software
How Much Debt Does Elmo Software Carry?
As you can see below, at the end of June 2021, Elmo Software had AU$30.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has AU$81.9m in cash, leading to a AU$51.9m net cash position.
A Look At Elmo Software's Liabilities
According to the last reported balance sheet, Elmo Software had liabilities of AU$91.4m due within 12 months, and liabilities of AU$58.3m due beyond 12 months. Offsetting this, it had AU$81.9m in cash and AU$13.9m in receivables that were due within 12 months. So its liabilities total AU$53.9m more than the combination of its cash and short-term receivables.
Of course, Elmo Software has a market capitalization of AU$421.1m, 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, Elmo Software also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Elmo Software's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Elmo Software wasn't profitable at an EBIT level, but managed to grow its revenue by 38%, to AU$69m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Elmo Software?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Elmo Software had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$30m of cash and made a loss of AU$38m. While this does make the company a bit risky, it's important to remember it has net cash of AU$51.9m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Elmo Software may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Elmo Software is showing 2 warning signs in our investment analysis , you should know about...
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
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