Socket Mobile (NASDAQ:SCKT) has a rock-solid balance sheet

Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Socket Mobile, Inc. (NASDAQ:SCKT) has debt on its balance sheet. But does this debt worry shareholders?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

See our latest analysis for Socket Mobile

What is Socket Mobile’s debt?

The image below, which you can click for more details, shows Socket Mobile had $1.85 million in debt at the end of March 2022, a reduction from $2.32 million year-over-year. However, his balance sheet shows that he holds $5.42 million in cash, so he actually has $3.57 million in net cash.


How strong is Socket Mobile’s balance sheet?

We can see from the most recent balance sheet that Socket Mobile had liabilities of US$5.34 million due in one year, and liabilities of US$20.7,000 due beyond. In return, he had $5.42 million in cash and $3.45 million in receivables due within 12 months. He can therefore boast of having $3.51 million in cash more than total Passives.

This excess liquidity suggests that Socket Mobile is taking a cautious approach to debt. Given that he has easily sufficient short-term cash, we don’t think he will have any problems with his lenders. Simply put, the fact that Socket Mobile has more cash than debt is arguably a good indication that it can safely manage its debt.

Even more impressive is the fact that Socket Mobile increased its EBIT by 613% year-over-year. This boost will make it even easier to pay off debt in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since Socket Mobile will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Although Socket Mobile has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how fast it’s building ( or erodes) that money. balance. Over the past three years, Socket Mobile has had free cash flow of 50% of its EBIT, which is about normal given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.


While we sympathize with investors who find debt a concern, you should keep in mind that Socket Mobile has a net cash position of US$3.57 million, as well as more liquid assets than liabilities. And it has impressed us with its 613% EBIT growth over the past year. So is Socket Mobile’s debt a risk? This does not seem to us to be the case. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 4 warning signs for Socket Mobile (2 doesn’t sit too well with us) you should know.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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