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. As with many other companies FARO Technologies, Inc. (NASDAQ:FARO) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for FARO Technologies

What Is FARO Technologies's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 FARO Technologies had debt of US$72.6m, up from none in one year. However, it does have US$79.9m in cash offsetting this, leading to net cash of US$7.32m.

How Strong Is FARO Technologies' Balance Sheet?

According to the last reported balance sheet, FARO Technologies had liabilities of US$105.5m due within 12 months, and liabilities of US$120.5m due beyond 12 months. Offsetting this, it had US$79.9m in cash and US$88.4m in receivables that were due within 12 months. So its liabilities total US$57.7m more than the combination of its cash and short-term receivables.

Since publicly traded FARO Technologies shares are worth a total of US$417.9m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, FARO Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if FARO Technologies 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 FARO Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 6.4%, to US$364m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is FARO Technologies?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months FARO Technologies lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$37m and booked a US$60m accounting loss. Given it only has net cash of US$7.32m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. We've identified 1 warning sign with FARO Technologies , and understanding them should be part of your investment process.

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.

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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.