Does Sonoma Pharmaceuticals (NASDAQ:SNOA) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Sonoma Pharmaceuticals, Inc. (NASDAQ:SNOA) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Sonoma Pharmaceuticals

What Is Sonoma Pharmaceuticals's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Sonoma Pharmaceuticals had debt of US$1.71m, up from US$1.58m in one year. But on the other hand it also has US$2.81m in cash, leading to a US$1.10m net cash position.

How Strong Is Sonoma Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sonoma Pharmaceuticals had liabilities of US$5.23m due within 12 months and liabilities of US$4.27m due beyond that. Offsetting these obligations, it had cash of US$2.81m as well as receivables valued at US$3.22m due within 12 months. So its liabilities total US$3.47m more than the combination of its cash and short-term receivables.

Sonoma Pharmaceuticals has a market capitalization of US$12.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Sonoma Pharmaceuticals 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 you can't view debt in total isolation; since Sonoma Pharmaceuticals will need earnings to service that debt. 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.

Over 12 months, Sonoma Pharmaceuticals made a loss at the EBIT level, and saw its revenue drop to US$17m, which is a fall of 14%. We would much prefer see growth.

So How Risky Is Sonoma Pharmaceuticals?

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 Sonoma Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$2.5m and booked a US$5.0m accounting loss. Given it only has net cash of US$1.10m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Be aware that Sonoma Pharmaceuticals is showing 4 warning signs in our investment analysis , and 1 of those is a bit concerning...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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