Would TOMI Environmental Solutions (NASDAQ:TOMZ) Be Better Off With Less 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 note that TOMI Environmental Solutions, Inc. (NASDAQ:TOMZ) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for TOMI Environmental Solutions

How Much Debt Does TOMI Environmental Solutions Carry?

As you can see below, at the end of June 2024, TOMI Environmental Solutions had US$2.33m of debt, up from none a year ago. Click the image for more detail. On the flip side, it has US$709.1k in cash leading to net debt of about US$1.62m.

How Strong Is TOMI Environmental Solutions' Balance Sheet?

The latest balance sheet data shows that TOMI Environmental Solutions had liabilities of US$2.41m due within a year, and liabilities of US$2.91m falling due after that. Offsetting these obligations, it had cash of US$709.1k as well as receivables valued at US$3.83m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$778.6k.

Of course, TOMI Environmental Solutions has a market capitalization of US$13.4m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

In the last year TOMI Environmental Solutions had a loss before interest and tax, and actually shrunk its revenue by 20%, to US$7.1m. That makes us nervous, to say the least.

Caveat Emptor

Not only did TOMI Environmental Solutions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$3.2m. 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$3.2m 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for TOMI Environmental Solutions (3 are a bit concerning!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com