Is Shenandoah Telecommunications (NASDAQ:SHEN) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Shenandoah Telecommunications Company (NASDAQ:SHEN) makes use of debt. But the real question is whether this debt is making the company risky.

We've discovered 1 warning sign about Shenandoah Telecommunications. View them for free.

When Is Debt A Problem?

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 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Shenandoah Telecommunications's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Shenandoah Telecommunications had US$416.9m of debt, an increase on US$298.6m, over one year. However, because it has a cash reserve of US$48.0m, its net debt is less, at about US$368.8m.

A Look At Shenandoah Telecommunications' Liabilities

We can see from the most recent balance sheet that Shenandoah Telecommunications had liabilities of US$114.6m falling due within a year, and liabilities of US$624.7m due beyond that. On the other hand, it had cash of US$48.0m and US$31.0m worth of receivables due within a year. So its liabilities total US$660.2m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$714.2m, so it does suggest shareholders should keep an eye on Shenandoah Telecommunications' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenandoah Telecommunications 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.

See our latest analysis for Shenandoah Telecommunications

In the last year Shenandoah Telecommunications wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to US$328m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Shenandoah Telecommunications managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at US$14m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$257m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Shenandoah Telecommunications that you should be aware of.

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.