Is Soligenix (NASDAQ:SNGX) Using Debt Sensibly?

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.' 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 Soligenix, Inc. (NASDAQ:SNGX) 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?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Soligenix

What Is Soligenix's Net Debt?

The chart below, which you can click on for greater detail, shows that Soligenix had US$9.88m in debt in June 2022; about the same as the year before. However, its balance sheet shows it holds US$20.2m in cash, so it actually has US$10.3m net cash.

How Healthy Is Soligenix's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Soligenix had liabilities of US$8.84m due within 12 months and liabilities of US$8.27m due beyond that. Offsetting this, it had US$20.2m in cash and US$430.8k in receivables that were due within 12 months. So it can boast US$3.48m more liquid assets than total liabilities.

This surplus suggests that Soligenix has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Soligenix boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Soligenix made a loss at the EBIT level, and saw its revenue drop to US$879k, which is a fall of 32%. 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. Indeed, in that time it burnt through US$12m of cash and made a loss of US$15m. Given it only has net cash of US$10.3m, the company may need to raise more capital if it doesn't reach break-even 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Soligenix (of which 2 shouldn't be ignored!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.