Is 22nd Century Group (NASDAQ:XXII) A Risky Investment?

By
Simply Wall St
Published
November 23, 2021
NasdaqCM:XXII
Source: Shutterstock

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, 22nd Century Group, Inc. (NASDAQ:XXII) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for 22nd Century Group

What Is 22nd Century Group's Net Debt?

The chart below, which you can click on for greater detail, shows that 22nd Century Group had US$1.78m in debt in September 2021; about the same as the year before. But on the other hand it also has US$55.2m in cash, leading to a US$53.4m net cash position.

debt-equity-history-analysis
NasdaqCM:XXII Debt to Equity History November 23rd 2021

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

The latest balance sheet data shows that 22nd Century Group had liabilities of US$6.96m due within a year, and liabilities of US$479.0k falling due after that. On the other hand, it had cash of US$55.2m and US$1.18m worth of receivables due within a year. So it actually has US$48.9m more liquid assets than total liabilities.

This surplus suggests that 22nd Century Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if 22nd Century Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year 22nd Century Group wasn't profitable at an EBIT level, but managed to grow its revenue by 7.9%, to US$30m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is 22nd Century Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year 22nd Century Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$22m of cash and made a loss of US$25m. But at least it has US$53.4m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for 22nd Century Group (of which 1 is potentially serious!) you should know about.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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