Yahoo Finance Sonoma Pharmaceuticals (NASDAQ:SNOA) Has Debt But No Earnings; Should You Worry?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Sonoma Pharmaceuticals, Inc. (NASDAQ:SNOA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Sonoma Pharmaceuticals
How Much Debt Does Sonoma Pharmaceuticals Carry?
The image below, which you can click on for greater detail, shows that at June 2021 Sonoma Pharmaceuticals had debt of US$1.71m, up from US$1.58m in one year. However, it does have US$2.81m in cash offsetting this, leading to net cash of US$1.10m.
How Strong Is Sonoma Pharmaceuticals' Balance Sheet?
We can see from the most recent balance sheet that Sonoma Pharmaceuticals had liabilities of US$5.23m falling due within a year, and liabilities of US$4.27m due beyond that. On the other hand, it had cash of US$2.81m and US$3.22m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.47m.
While this might seem like a lot, it is not so bad since Sonoma Pharmaceuticals has a market capitalization of US$12.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Sonoma Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sonoma Pharmaceuticals will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Sonoma Pharmaceuticals made a loss at the EBIT level, and saw its revenue drop to US$17m, which is a fall of 14%. That's not what we would hope to see.
So How Risky Is Sonoma Pharmaceuticals?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Sonoma Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$2.5m and booked a US$5.0m accounting loss. Given it only has net cash of US$1.10m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example Sonoma Pharmaceuticals has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
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.
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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