The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Soligenix, Inc. (NASDAQ:SNGX) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Soligenix's Debt?
As you can see below, Soligenix had US$9.86m of debt at December 2021, down from US$10.3m a year prior. However, its balance sheet shows it holds US$26.0m in cash, so it actually has US$16.2m net cash.
How Healthy Is Soligenix's Balance Sheet?
We can see from the most recent balance sheet that Soligenix had liabilities of US$6.29m falling due within a year, and liabilities of US$9.86m due beyond that. Offsetting this, it had US$26.0m in cash and US$242.7k in receivables that were due within 12 months. So it can boast US$10.1m more liquid assets than total liabilities.
This surplus strongly suggests that Soligenix has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Soligenix boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Soligenix's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Soligenix had a loss before interest and tax, and actually shrunk its revenue by 65%, to US$824k. To be frank that doesn't bode well.
So How Risky Is Soligenix?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Soligenix lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$12m and booked a US$13m accounting loss. With only US$16.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example Soligenix has 5 warning signs (and 2 which shouldn't be ignored) we think you should know about.
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.
What are the risks and opportunities for Soligenix?
Revenue is forecast to grow 126.77% per year
Earnings are forecast to decline by an average of 17.4% per year for the next 3 years
Makes less than USD$1m in revenue ($858K)
Does not have a meaningful market cap ($20M)
Volatile share price over the past 3 months
Currently unprofitable and not forecast to become profitable over the next 3 years
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