The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Smart Sand, Inc. (NASDAQ:SND) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. 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. 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.
How Much Debt Does Smart Sand Carry?
You can click the graphic below for the historical numbers, but it shows that Smart Sand had US$22.1m of debt in December 2021, down from US$28.9m, one year before. But on the other hand it also has US$25.6m in cash, leading to a US$3.46m net cash position.
How Healthy Is Smart Sand's Balance Sheet?
According to the last reported balance sheet, Smart Sand had liabilities of US$48.6m due within 12 months, and liabilities of US$84.3m due beyond 12 months. Offsetting this, it had US$25.6m in cash and US$32.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$75.2m.
While this might seem like a lot, it is not so bad since Smart Sand has a market capitalization of US$201.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Smart Sand also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Smart Sand'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 Smart Sand wasn't profitable at an EBIT level, but managed to grow its revenue by 3.5%, to US$127m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Smart Sand?
While Smart Sand lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$21m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. We've identified 3 warning signs with Smart Sand , and understanding them should be part of your investment process.
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.
What are the risks and opportunities for Smart Sand?
Trading at 32.5% below our estimate of its fair value
Became profitable this year
Earnings are forecast to decline by an average of 66.3% per year for the next 3 years
Does not have a meaningful market cap ($95M)
Large one-off items impacting financial results
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Smart Sand, Inc., an integrated frac sand supply and services company, engages in the excavation, processing, and sale of sands or proppant for use in hydraulic fracturing operations in the oil and gas industry in the United States.
Flawless balance sheet and good value.