Safe & Green Holdings (NASDAQ:SGBX) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Safe & Green Holdings Corp. (NASDAQ:SGBX) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Safe & Green Holdings

How Much Debt Does Safe & Green Holdings Carry?

As you can see below, at the end of June 2023, Safe & Green Holdings had US$9.32m of debt, up from US$2.75m a year ago. Click the image for more detail. However, it does have US$1.60m in cash offsetting this, leading to net debt of about US$7.71m.

A Look At Safe & Green Holdings' Liabilities

According to the last reported balance sheet, Safe & Green Holdings had liabilities of US$15.1m due within 12 months, and liabilities of US$3.43m due beyond 12 months. On the other hand, it had cash of US$1.60m and US$1.52m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$15.4m.

This deficit is considerable relative to its market capitalization of US$18.0m, so it does suggest shareholders should keep an eye on Safe & Green Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Safe & Green Holdings 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.

In the last year Safe & Green Holdings had a loss before interest and tax, and actually shrunk its revenue by 44%, to US$19m. That makes us nervous, to say the least.

Caveat Emptor

While Safe & Green Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$15m. 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. However, it doesn't help that it burned through US$4.7m of cash over the last year. So suffice it to say we consider the stock very 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. To that end, you should learn about the 5 warning signs we've spotted with Safe & Green Holdings (including 2 which can't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.