Is Smart Sand (NASDAQ:SND) weighed down by its debt?
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that Smart Sand, Inc. (NASDAQ:SND) uses debt in its business. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Smart Sand
What is Smart Sand’s debt?
You can click on the chart below for historical numbers, but it shows Smart Sand had US$22.1 million in debt in December 2021, up from US$28.9 million a year prior. But on the other hand, he also has $25.6 million in cash, resulting in a net cash position of $3.46 million.
How healthy is Smart Sand’s balance sheet?
According to the last published balance sheet, Smart Sand had liabilities of US$48.6 million due within 12 months and liabilities of US$84.3 million due beyond 12 months. In return, he had $25.6 million in cash and $32.1 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and receivables (current) by $75.2 million.
While that might sound like a lot, it’s not too bad since Smart Sand has a market capitalization of US$201.2 million, so it could probably bolster its balance sheet by raising capital if needed. However, it is always worth taking a close look at your ability to repay debt. While he has some liabilities to note, Smart Sand also has more cash than debt, so we’re pretty confident he can manage his debt safely. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Smart Sand’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Last year, Smart Sand was not profitable in terms of EBIT, but managed to increase its revenue by 3.5%, to $127 million. We generally like to see faster growth from unprofitable companies, but each in its own way.
So how risky is Smart Sand?
While Smart Sand lost money in earnings before interest and taxes (EBIT), it actually generated positive free cash flow of US$21 million. So, although it is loss-making, it does not seem to have too much short-term balance sheet risk, given net cash. Until we see a positive EBIT, we are a little cautious on the stock, especially given the rather modest revenue growth. 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. We have identified 3 warning signs with Smart Sand, and understanding them should be part of your investment process.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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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.