Is S&W Seed (NASDAQ:SANW) Using Debt Sensibly?

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.' 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 note that S&W Seed Company (NASDAQ:SANW) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for S&W Seed

What Is S&W Seed's Net Debt?

As you can see below, S&W Seed had US$46.8m of debt at March 2023, down from US$49.0m a year prior. However, it does have US$1.57m in cash offsetting this, leading to net debt of about US$45.3m.

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

We can see from the most recent balance sheet that S&W Seed had liabilities of US$71.4m falling due within a year, and liabilities of US$6.22m due beyond that. Offsetting these obligations, it had cash of US$1.57m as well as receivables valued at US$20.4m due within 12 months. So it has liabilities totalling US$55.6m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's US$38.2m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year S&W Seed had a loss before interest and tax, and actually shrunk its revenue by 4.9%, to US$70m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months S&W Seed produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$24m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$18m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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 S&W Seed has 6 warning signs (and 3 which are significant) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.