Is S&W Seed (NASDAQ:SANW) A Risky Investment?

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 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. As with many other companies S&W Seed Company (NASDAQ:SANW) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for S&W Seed

How Much Debt Does S&W Seed Carry?

As you can see below, at the end of September 2022, S&W Seed had US$50.6m of debt, up from US$47.2m a year ago. Click the image for more detail. However, it does have US$1.22m in cash offsetting this, leading to net debt of about US$49.4m.

A Look At S&W Seed's Liabilities

Zooming in on the latest balance sheet data, we can see that S&W Seed had liabilities of US$76.5m due within 12 months and liabilities of US$7.23m due beyond that. Offsetting this, it had US$1.22m in cash and US$27.7m in receivables that were due within 12 months. So its liabilities total US$54.8m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$59.7m, so it does suggest shareholders should keep an eye on S&W Seed's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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.

In the last year S&W Seed had a loss before interest and tax, and actually shrunk its revenue by 12%, to US$76m. That's not what we would hope to see.

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). Its EBIT loss was a whopping US$29m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$22m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 5 warning signs for S&W Seed you should be aware of, and 1 of them is significant.

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.