Is Sangoma Technologies (TSE:STC) Using Too Much Debt?

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 can see that Sangoma Technologies Corporation (TSE:STC) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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 Sangoma Technologies

What Is Sangoma Technologies's Net Debt?

As you can see below, at the end of December 2022, Sangoma Technologies had US$98.8m of debt, up from US$67.9m a year ago. Click the image for more detail. On the flip side, it has US$6.80m in cash leading to net debt of about US$92.0m.

How Healthy Is Sangoma Technologies' Balance Sheet?

We can see from the most recent balance sheet that Sangoma Technologies had liabilities of US$71.1m falling due within a year, and liabilities of US$116.6m due beyond that. Offsetting these obligations, it had cash of US$6.80m as well as receivables valued at US$25.4m due within 12 months. So its liabilities total US$155.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$95.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Sangoma Technologies would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Sangoma Technologies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Sangoma Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 34%, to US$246m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Sangoma Technologies still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$6.5m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of US$111m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. To that end, you should be aware of the 4 warning signs we've spotted with Sangoma Technologies .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.