Is Smart Sand (NASDAQ:SND) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Smart Sand, Inc. (NASDAQ:SND) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Smart Sand

What Is Smart Sand's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Smart Sand had US$25.6m of debt in June 2021, down from US$30.8m, one year before. However, it does have US$39.3m in cash offsetting this, leading to net cash of US$13.7m.

How Strong Is Smart Sand's Balance Sheet?

According to the last reported balance sheet, Smart Sand had liabilities of US$34.6m due within 12 months, and liabilities of US$94.1m due beyond 12 months. Offsetting this, it had US$39.3m in cash and US$11.6m in receivables that were due within 12 months. So it has liabilities totalling US$77.8m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$102.2m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Smart Sand boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Smart Sand can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Smart Sand made a loss at the EBIT level, and saw its revenue drop to US$106m, which is a fall of 43%. That makes us nervous, to say the least.

So How Risky Is Smart Sand?

Although Smart Sand had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$2.2m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Smart Sand has 2 warning signs we think you should be aware of.

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.

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.

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