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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Smart Sand, Inc. (NASDAQ:SND) makes use of debt. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
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$27.3m of debt in March 2021, down from US$37.1m, one year before. However, it does have US$11.4m in cash offsetting this, leading to net debt of about US$15.9m.
How Healthy Is Smart Sand's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Smart Sand had liabilities of US$37.3m due within 12 months and liabilities of US$94.4m due beyond that. Offsetting this, it had US$11.4m in cash and US$66.9m in receivables that were due within 12 months. So its liabilities total US$53.4m more than the combination of its cash and short-term receivables.
Smart Sand has a market capitalization of US$119.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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.
In the last year Smart Sand had a loss before interest and tax, and actually shrunk its revenue by 55%, to US$102m. To be frank that doesn't bode well.
While Smart Sand's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$19m at the EBIT level. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of US$11m and the profit of US$34m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Smart Sand (1 is significant) you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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What are the risks and opportunities for Smart Sand?
Earnings are forecast to grow 97.56% per year
Does not have a meaningful market cap ($80M)
Shareholders have been diluted in the past year
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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.
Moderate growth potential and slightly overvalued.