Does 22nd Century Group (NASDAQ:XXII) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that 22nd Century Group, Inc. (NASDAQ:XXII) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for 22nd Century Group

How Much Debt Does 22nd Century Group Carry?

The image below, which you can click on for greater detail, shows that at September 2022 22nd Century Group had debt of US$6.05m, up from US$1.78m in one year. However, its balance sheet shows it holds US$43.7m in cash, so it actually has US$37.7m net cash.

How Healthy Is 22nd Century Group's Balance Sheet?

The latest balance sheet data shows that 22nd Century Group had liabilities of US$18.7m due within a year, and liabilities of US$2.42m falling due after that. Offsetting this, it had US$43.7m in cash and US$4.95m in receivables that were due within 12 months. So it actually has US$27.6m more liquid assets than total liabilities.

This short term liquidity is a sign that 22nd Century Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that 22nd Century Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine 22nd Century Group'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.

Over 12 months, 22nd Century Group reported revenue of US$49m, which is a gain of 116%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is 22nd Century Group?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that 22nd Century Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$41m of cash and made a loss of US$47m. But at least it has US$37.7m on the balance sheet to spend on growth, near-term. The good news for shareholders is that 22nd Century Group has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. For example, we've discovered 3 warning signs for 22nd Century Group (1 is a bit unpleasant!) that you should be aware of before investing here.

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.

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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.