Is SG Blocks (NASDAQ:SGBX) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that SG Blocks, Inc. (NASDAQ:SGBX) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for SG Blocks

What Is SG Blocks's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 SG Blocks had debt of US$2.75m, up from none in one year. On the flip side, it has US$2.43m in cash leading to net debt of about US$319.6k.

A Look At SG Blocks' Liabilities

Zooming in on the latest balance sheet data, we can see that SG Blocks had liabilities of US$8.72m due within 12 months and liabilities of US$3.06m due beyond that. On the other hand, it had cash of US$2.43m and US$2.51m worth of receivables due within a year. So its liabilities total US$6.84m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because SG Blocks is worth US$25.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Carrying virtually no net debt, SG Blocks has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But it is SG Blocks'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.

Over 12 months, SG Blocks reported revenue of US$33m, which is a gain of 15%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months SG Blocks produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$5.8m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$8.0m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for SG Blocks (2 can't be ignored) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.