Cyanotech (NASDAQ:CYAN) Is Carrying A Fair Bit Of Debt

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.' 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. We note that Cyanotech Corporation (NASDAQ:CYAN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Cyanotech

What Is Cyanotech's Net Debt?

The image below, which you can click on for greater detail, shows that Cyanotech had debt of US$7.95m at the end of December 2020, a reduction from US$8.87m over a year. However, because it has a cash reserve of US$3.32m, its net debt is less, at about US$4.63m.

How Strong Is Cyanotech's Balance Sheet?

The latest balance sheet data shows that Cyanotech had liabilities of US$6.66m due within a year, and liabilities of US$7.30m falling due after that. Offsetting this, it had US$3.32m in cash and US$1.68m in receivables that were due within 12 months. So its liabilities total US$8.95m more than the combination of its cash and short-term receivables.

Cyanotech has a market capitalization of US$19.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Cyanotech's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Cyanotech reported revenue of US$32m, which is a gain of 7.5%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Cyanotech produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$163k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of US$1.3m and a profit of US$1.2m. So one might argue that there's still a chance it can get things on the right track. 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. Be aware that Cyanotech is showing 5 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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