Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘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. As with many other companies Sequans Communications S.A. (NYSE:SQNS) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
Check out our latest analysis for Sequans Communications
How Much Debt Does Sequans Communications Carry?
As you can see below, at the end of September 2022, Sequans Communications had US$51.3m of debt, up from US$44.0m a year ago. Click the image for more detail. However, it also had US$5.83m in cash, and so its net debt is US$45.5m.
How Strong Is Sequans Communications’ Balance Sheet?
The latest balance sheet data shows that Sequans Communications had liabilities of US$39.9m due within a year, and liabilities of US$59.6m falling due after that. Offsetting these obligations, it had cash of US$5.83m as well as receivables valued at US$29.6m due within 12 months. So its liabilities total US$64.1m more than the combination of its cash and short-term receivables.
This deficit isn’t so bad because Sequans Communications is worth US$158.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Sequans Communications 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, Sequans Communications reported revenue of US$58m, which is a gain of 11%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months Sequans Communications produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$8.1m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn’t help that it burned through US$38m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we’ve discovered 4 warning signs for Sequans Communications (2 are concerning!) that you should be aware of before investing here.
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.
What are the risks and opportunities for Sequans Communications?
Sequans Communications S.A. designs, develops, and supplies cellular semiconductor solutions for massive and broadband Internet of Things (IoT) markets in Taiwan, South Korea, China, rest of Asia, the United States, and internationally.
Rewards
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Revenue is forecast to grow 18.81% per year
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Earnings have grown 7.4% per year over the past 5 years
Risks
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Earnings are forecast to decline by an average of 23% per year for the next 3 years
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Has less than 1 year of cash runway
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Shareholders have been diluted in the past year
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Currently unprofitable and not forecast to become profitable over the next 3 years
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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.
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