David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Digital Turbine, Inc. (NASDAQ:APPS) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Digital Turbine
What Is Digital Turbine's Debt?
The image below, which you can click on for greater detail, shows that Digital Turbine had debt of US$383.8m at the end of September 2023, a reduction from US$447.2m over a year. However, because it has a cash reserve of US$58.1m, its net debt is less, at about US$325.7m.
A Look At Digital Turbine's Liabilities
The latest balance sheet data shows that Digital Turbine had liabilities of US$244.8m due within a year, and liabilities of US$398.5m falling due after that. On the other hand, it had cash of US$58.1m and US$195.5m worth of receivables due within a year. So its liabilities total US$389.7m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of US$604.8m, so it does suggest shareholders should keep an eye on Digital Turbine's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Digital Turbine can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Digital Turbine made a loss at the EBIT level, and saw its revenue drop to US$592m, which is a fall of 23%. That makes us nervous, to say the least.
Caveat Emptor
While Digital Turbine's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$2.3m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$180m into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Digital Turbine .
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.