SmileDirectClub (NASDAQ:SDC) Is Carrying A Fair Bit Of Debt

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.' 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, SmileDirectClub, Inc. (NASDAQ:SDC) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for SmileDirectClub

How Much Debt Does SmileDirectClub Carry?

As you can see below, at the end of December 2020, SmileDirectClub had US$386.6m of debt, up from US$182.0m a year ago. Click the image for more detail. On the flip side, it has US$316.7m in cash leading to net debt of about US$69.8m.

A Look At SmileDirectClub's Liabilities

We can see from the most recent balance sheet that SmileDirectClub had liabilities of US$186.5m falling due within a year, and liabilities of US$464.1m due beyond that. Offsetting this, it had US$316.7m in cash and US$222.0m in receivables that were due within 12 months. So its liabilities total US$112.0m more than the combination of its cash and short-term receivables.

Given SmileDirectClub has a market capitalization of US$3.19b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SmileDirectClub'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, SmileDirectClub made a loss at the EBIT level, and saw its revenue drop to US$607m, which is a fall of 14%. That's not what we would hope to see.

Caveat Emptor

Not only did SmileDirectClub's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$234m at the EBIT level. 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. Another cause for caution is that is bled US$181m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. We've identified 1 warning sign with SmileDirectClub , and understanding them should be part of your investment process.

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. 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.
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