Is Sangoma Technologies (TSE:STC) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Sangoma Technologies Corporation (TSE:STC) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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.

Check out our latest analysis for Sangoma Technologies

What Is Sangoma Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sangoma Technologies had US$96.7m of debt in March 2023, down from US$109.1m, one year before. However, it does have US$9.08m in cash offsetting this, leading to net debt of about US$87.6m.

How Healthy Is Sangoma Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sangoma Technologies had liabilities of US$69.6m due within 12 months and liabilities of US$111.5m due beyond that. On the other hand, it had cash of US$9.08m and US$25.6m worth of receivables due within a year. So it has liabilities totalling US$146.4m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$146.6m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sangoma Technologies 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.

In the last year Sangoma Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to US$255m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Sangoma Technologies's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$2.6m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of US$105m. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Sangoma Technologies is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

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.