One-stop-shop systems (NASDAQ: OSS) seem to use debt rather sparingly

Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We can see that Single Window Systems, Inc. (NASDAQ: OSS) uses debt in its business. But the most important question is: what risk does this debt create?

Why Does Debt Bring Risk?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution of a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.

See our latest analysis for One Stop Systems

How Much Debt Do Single Window Systems Carry?

The image below, which you can click for more details, shows One Stop Systems owed $ 4.31 million in debt at the end of September 2021, a reduction from $ 5.48 million. US dollars over one year. But on the other hand, it also has $ 18.5 million in cash, which leads to a net cash position of $ 14.2 million.

NasdaqCM: OSS History of debt to equity December 31, 2021

How healthy is One Stop Systems’ balance sheet?

Zooming in on the latest balance sheet data, we can see that One Stop Systems had a liability of US $ 11.6 million owed within 12 months and no liabilities owed beyond. In compensation for these obligations, he had cash of US $ 18.5 million as well as receivables valued at US $ 5.81 million due within 12 months. So he actually has $ 12.7 million Following liquid assets as total liabilities.

This short-term liquidity is a sign that One Stop Systems could probably repay its debt easily, as its balance sheet is far from tight. Put simply, the fact that One Stop Systems has more cash than debt is arguably a good indication that it can safely manage its debt.

Best of all, One Stop Systems increased its EBIT 166% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in the years to come. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, the company’s future profitability will decide whether One Stop Systems can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. One Stop Systems may have net cash on the balance sheet, but it’s always interesting to consider the extent to which the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Fortunately for all shareholders, One Stop Systems has actually generated more free cash flow than EBIT over the past two years. This kind of solid silver generation warms our hearts like a puppy in a bumblebee costume.

In summary

As much as we sympathize with investors who find debt worrying, you should keep in mind that One Stop Systems has US $ 14.2 million in net cash, plus more liquid assets than liabilities. . The icing on the cake was that he converted 111% of that EBIT into free cash flow, bringing in US $ 4.0 million. We therefore do not believe that One Stop Systems’ use of debt is risky. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 4 warning signs for one-stop-shop systems which you should know before investing here.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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