Does S&W Seed (NASDAQ:SANW) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that S&W Seed Company (NASDAQ:SANW) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for S&W Seed

What Is S&W Seed's Debt?

As you can see below, at the end of March 2022, S&W Seed had US$49.2m of debt, up from US$46.1m a year ago. Click the image for more detail. However, because it has a cash reserve of US$3.14m, its net debt is less, at about US$46.0m.

How Strong Is S&W Seed's Balance Sheet?

We can see from the most recent balance sheet that S&W Seed had liabilities of US$59.7m falling due within a year, and liabilities of US$32.0m due beyond that. Offsetting this, it had US$3.14m in cash and US$23.6m in receivables that were due within 12 months. So its liabilities total US$64.9m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's US$52.4m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 S&W Seed's ability to maintain a healthy balance sheet going forward. 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, S&W Seed made a loss at the EBIT level, and saw its revenue drop to US$74m, which is a fall of 15%. We would much prefer see growth.

Caveat Emptor

Not only did S&W Seed's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$26m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$24m over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 5 warning signs we've spotted with S&W Seed (including 1 which is concerning) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.