Is TOMI Environmental Solutions (NASDAQ:TOMZ) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 TOMI Environmental Solutions, Inc. (NASDAQ:TOMZ) does use debt in its business. But the real question is whether this debt is making the company risky.

We've discovered 4 warning signs about TOMI Environmental Solutions. View them for free.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is TOMI Environmental Solutions's Net Debt?

The chart below, which you can click on for greater detail, shows that TOMI Environmental Solutions had US$2.36m in debt in December 2024; about the same as the year before. However, it also had US$664.9k in cash, and so its net debt is US$1.70m.

How Strong Is TOMI Environmental Solutions' Balance Sheet?

The latest balance sheet data shows that TOMI Environmental Solutions had liabilities of US$2.72m due within a year, and liabilities of US$2.87m falling due after that. Offsetting this, it had US$664.9k in cash and US$1.88m in receivables that were due within 12 months. So its liabilities total US$3.05m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because TOMI Environmental Solutions is worth US$15.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine TOMI Environmental Solutions'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.

See our latest analysis for TOMI Environmental Solutions

In the last year TOMI Environmental Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by 5.2%, to US$7.7m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, TOMI Environmental Solutions had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$4.1m. 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. Another cause for caution is that is bled US$1.7m in negative free cash flow over the last twelve months. 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with TOMI Environmental Solutions (including 2 which are a bit unpleasant) .

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.