Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, POET Technologies Inc. (CVE:PTK) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is POET Technologies's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2020 POET Technologies had US$2.73m of debt, an increase on none, over one year. But on the other hand it also has US$12.3m in cash, leading to a US$9.60m net cash position.
How Healthy Is POET Technologies's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that POET Technologies had liabilities of US$4.26m due within 12 months and liabilities of US$103.5k due beyond that. Offsetting this, it had US$12.3m in cash and US$128.9k in receivables that were due within 12 months. So it actually has US$8.10m more liquid assets than total liabilities.
This surplus suggests that POET Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, POET Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if POET Technologies 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.
While it hasn't made a profit, at least POET Technologies booked its first revenue as a publicly listed company, in the last twelve months.
So How Risky Is POET Technologies?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that POET Technologies had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$10.6m of cash and made a loss of US$13.1m. But at least it has US$9.60m on the balance sheet to spend on growth, near-term. The good news for shareholders is that POET Technologies has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for POET Technologies (1 is a bit concerning!) that you should be aware of before investing here.
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.
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. 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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