Is Cyanotech (NASDAQ:CYAN) Using Debt Sensibly?

Warren Buffett famously said, '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 can see that Cyanotech Corporation (NASDAQ:CYAN) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Cyanotech

How Much Debt Does Cyanotech Carry?

As you can see below, at the end of December 2023, Cyanotech had US$6.81m of debt, up from US$6.48m a year ago. Click the image for more detail. However, because it has a cash reserve of US$661.0k, its net debt is less, at about US$6.15m.

A Look At Cyanotech's Liabilities

According to the last reported balance sheet, Cyanotech had liabilities of US$8.54m due within 12 months, and liabilities of US$4.88m due beyond 12 months. On the other hand, it had cash of US$661.0k and US$2.04m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$10.7m.

This deficit casts a shadow over the US$4.97m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Cyanotech would probably need a major re-capitalization if its creditors were to demand repayment. 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.

In the last year Cyanotech had a loss before interest and tax, and actually shrunk its revenue by 13%, to US$22m. We would much prefer see growth.

Caveat Emptor

While Cyanotech's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$3.9m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$66k over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Cyanotech is showing 3 warning signs in our investment analysis , and 2 of those are significant...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.