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Is Minim (NASDAQ:MINM) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Minim, Inc. (NASDAQ:MINM) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Minim

What Is Minim's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Minim had US$7.09m of debt, an increase on US$583.3k, over one year. But it also has US$18.9m in cash to offset that, meaning it has US$11.8m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Minim's Balance Sheet?

We can see from the most recent balance sheet that Minim had liabilities of US$23.7m falling due within a year, and liabilities of US$747.4k due beyond that. Offsetting these obligations, it had cash of US$18.9m as well as receivables valued at US$11.6m due within 12 months. So it can boast US$5.95m more liquid assets than total liabilities.

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This surplus suggests that Minim has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Minim boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Minim can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Minim wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to US$59m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Minim?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Minim had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$18m and booked a US$1.6m accounting loss. With only US$11.8m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Minim may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 5 warning signs with Minim (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.