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.' 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, Mitek Systems, Inc. (NASDAQ:MITK) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Mitek Systems's Debt?
The image below, which you can click on for greater detail, shows that at March 2024 Mitek Systems had debt of US$141.7m, up from US$133.0m in one year. However, because it has a cash reserve of US$123.9m, its net debt is less, at about US$17.8m.
NasdaqCM:MITK Debt to Equity History May 23rd 2024
How Healthy Is Mitek Systems' Balance Sheet?
The latest balance sheet data shows that Mitek Systems had liabilities of US$47.3m due within a year, and liabilities of US$153.6m falling due after that. Offsetting these obligations, it had cash of US$123.9m as well as receivables valued at US$67.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$9.76m.
Having regard to Mitek Systems' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$589.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. 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 Mitek Systems 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.
Over 12 months, Mitek Systems made a loss at the EBIT level, and saw its revenue drop to US$165m, which is a fall of 3.5%. We would much prefer see growth.
Caveat Emptor
Importantly, Mitek Systems had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$2.8m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of US$7.4m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Mitek Systems , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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.
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オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。