Is Stronghold Digital Mining (NASDAQ:SDIG) A Risky Investment?

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. We note that Stronghold Digital Mining, Inc. (NASDAQ:SDIG) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Stronghold Digital Mining

What Is Stronghold Digital Mining's Debt?

You can click the graphic below for the historical numbers, but it shows that Stronghold Digital Mining had US$56.7m of debt in March 2024, down from US$62.0m, one year before. However, because it has a cash reserve of US$7.54m, its net debt is less, at about US$49.2m.

How Strong Is Stronghold Digital Mining's Balance Sheet?

We can see from the most recent balance sheet that Stronghold Digital Mining had liabilities of US$36.0m falling due within a year, and liabilities of US$68.2m due beyond that. Offsetting these obligations, it had cash of US$7.54m as well as receivables valued at US$1.84m due within 12 months. So it has liabilities totalling US$94.8m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$47.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Stronghold Digital Mining would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Stronghold Digital Mining can strengthen its balance sheet over time. 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, Stronghold Digital Mining made a loss at the EBIT level, and saw its revenue drop to US$85m, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

While Stronghold Digital Mining's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$42m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$22m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 6 warning signs for Stronghold Digital Mining you should be aware of, and 3 of them are significant.

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.

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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.