Does Structural Monitoring Systems (ASX:SMN) Have A Healthy Balance Sheet?

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. Importantly, Structural Monitoring Systems Plc (ASX:SMN) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Structural Monitoring Systems

What Is Structural Monitoring Systems's Net Debt?

The chart below, which you can click on for greater detail, shows that Structural Monitoring Systems had AU$5.42m in debt in June 2023; about the same as the year before. However, it does have AU$961.0k in cash offsetting this, leading to net debt of about AU$4.46m.

How Healthy Is Structural Monitoring Systems' Balance Sheet?

We can see from the most recent balance sheet that Structural Monitoring Systems had liabilities of AU$10.6m falling due within a year, and liabilities of AU$7.84m due beyond that. Offsetting these obligations, it had cash of AU$961.0k as well as receivables valued at AU$1.98m due within 12 months. So it has liabilities totalling AU$15.5m more than its cash and near-term receivables, combined.

Given Structural Monitoring Systems has a market capitalization of AU$98.0m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is Structural Monitoring Systems's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Structural Monitoring Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 43%, to AU$22m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Structural Monitoring Systems still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at AU$2.6m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$2.8m in negative free cash flow over the last twelve months. So to be blunt we think it is 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Structural Monitoring Systems (of which 1 is a bit concerning!) 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.

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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.