Is Sorrento Therapeutics (NASDAQ:SRNE) A Risky Investment?

Warren Buffett famously said, '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. We note that Sorrento Therapeutics, Inc. (NASDAQ:SRNE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sorrento Therapeutics

What Is Sorrento Therapeutics's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Sorrento Therapeutics had debt of US$153.0m, up from US$101.7m in one year. But on the other hand it also has US$270.7m in cash, leading to a US$117.6m net cash position.

How Strong Is Sorrento Therapeutics' Balance Sheet?

We can see from the most recent balance sheet that Sorrento Therapeutics had liabilities of US$204.2m falling due within a year, and liabilities of US$425.2m due beyond that. Offsetting this, it had US$270.7m in cash and US$24.7m in receivables that were due within 12 months. So it has liabilities totalling US$334.1m more than its cash and near-term receivables, combined.

Sorrento Therapeutics has a market capitalization of US$1.06b, 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, Sorrento Therapeutics 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 Sorrento Therapeutics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Sorrento Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to US$57m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Sorrento Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Sorrento Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$362m and booked a US$472m accounting loss. Given it only has net cash of US$117.6m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Sorrento Therapeutics may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Case in point: We've spotted 4 warning signs for Sorrento Therapeutics you should be aware of, and 2 of them don't sit too well with us.

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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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.