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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Select Sands Corp. (CVE:SNS) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Select Sands
What Is Select Sands's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2021 Select Sands had debt of US$11.1m, up from US$9.14m in one year. Net debt is about the same, since the it doesn't have much cash.
How Strong Is Select Sands' Balance Sheet?
According to the last reported balance sheet, Select Sands had liabilities of US$5.38m due within 12 months, and liabilities of US$8.11m due beyond 12 months. On the other hand, it had cash of US$56.1k and US$2.65m worth of receivables due within a year. So its liabilities total US$10.8m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$6.95m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Select Sands would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Select Sands 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, Select Sands reported revenue of US$17m, which is a gain of 145%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth
Caveat Emptor
Even though Select Sands managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable US$1.2m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$3.4m over the last twelve months. So suffice it to say we consider the stock to be 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 instance, we've identified 4 warning signs for Select Sands (3 don't sit too well with us) you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
About TSXV:SNS
Low and slightly overvalued.
