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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Mitek Systems, Inc. (NASDAQ:MITK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Mitek Systems Carry?
As you can see below, at the end of June 2024, Mitek Systems had US$143.8m of debt, up from US$134.9m a year ago. Click the image for more detail. However, it does have US$123.1m in cash offsetting this, leading to net debt of about US$20.8m.
How Healthy Is Mitek Systems' Balance Sheet?
We can see from the most recent balance sheet that Mitek Systems had liabilities of US$43.9m falling due within a year, and liabilities of US$155.7m due beyond that. Offsetting this, it had US$123.1m in cash and US$58.4m in receivables that were due within 12 months. So its liabilities total US$18.1m more than the combination of its cash and short-term receivables.
Since publicly traded Mitek Systems shares are worth a total of US$383.0m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Mitek Systems'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 Mitek Systems had a loss before interest and tax, and actually shrunk its revenue by 4.6%, to US$167m. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Mitek Systems produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$4.6m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$6.7m into a profit. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Mitek Systems you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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