Does Snail (NASDAQ:SNAL) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Snail, Inc. (NASDAQ:SNAL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Snail

What Is Snail's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Snail had US$5.74m of debt in September 2024, down from US$13.7m, one year before. However, its balance sheet shows it holds US$10.6m in cash, so it actually has US$4.82m net cash.

How Strong Is Snail's Balance Sheet?

According to the last reported balance sheet, Snail had liabilities of US$43.6m due within 12 months, and liabilities of US$20.5m due beyond 12 months. Offsetting these obligations, it had cash of US$10.6m as well as receivables valued at US$10.8m due within 12 months. So it has liabilities totalling US$42.7m more than its cash and near-term receivables, combined.

Snail has a market capitalization of US$91.6m, 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. Despite its noteworthy liabilities, Snail boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Snail made a loss at the EBIT level, last year, but improved that to positive EBIT of US$4.5m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Snail can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Snail has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Snail actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Snail does have more liabilities than liquid assets, it also has net cash of US$4.82m. And it impressed us with free cash flow of US$13m, being 292% of its EBIT. So we don't have any problem with Snail's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Snail is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

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.