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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. We note that Serko Limited (NZSE:SKO) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Serko
How Much Debt Does Serko Carry?
The image below, which you can click on for greater detail, shows that Serko had debt of NZ$203.0k at the end of March 2019, a reduction from NZ$555.0k over a year. But on the other hand it also has NZ$15.7m in cash, leading to a NZ$15.5m net cash position.
How Strong Is Serko's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Serko had liabilities of NZ$6.89m due within 12 months and liabilities of NZ$283.0k due beyond that. Offsetting these obligations, it had cash of NZ$15.7m as well as receivables valued at NZ$4.91m due within 12 months. So it actually has NZ$13.5m more liquid assets than total liabilities.
This short term liquidity is a sign that Serko could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Serko has more cash than debt is arguably a good indication that it can manage its debt safely.
In fact Serko's saving grace is its low debt levels, because its EBIT has tanked 21% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Serko's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.