Is Societal CDMO (NASDAQ:SCTL) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Societal CDMO, Inc. (NASDAQ:SCTL) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Societal CDMO

How Much Debt Does Societal CDMO Carry?

As you can see below, Societal CDMO had US$37.3m of debt at September 2023, down from US$99.2m a year prior. However, because it has a cash reserve of US$8.16m, its net debt is less, at about US$29.2m.

How Strong Is Societal CDMO's Balance Sheet?

The latest balance sheet data shows that Societal CDMO had liabilities of US$21.6m due within a year, and liabilities of US$71.7m falling due after that. On the other hand, it had cash of US$8.16m and US$24.8m worth of receivables due within a year. So it has liabilities totalling US$60.3m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$33.5m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Societal CDMO would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Societal CDMO 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.

Over 12 months, Societal CDMO reported revenue of US$91m, which is a gain of 3.4%, 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

Importantly, Societal CDMO had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$3.7m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$11m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. To that end, you should be aware of the 4 warning signs we've spotted with Societal CDMO .

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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