Cyanotech (NASDAQ: CYAN) carries much of the debt
Legendary fund manager Li Lu (who Charlie Munger supported) once said, âThe biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We notice that Cyanotech Company (NASDAQ: CYAN) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
When Is Debt a Problem?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies 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 flow and debt together.
See our latest review for Cyanotech
What is Cyanotech’s net debt?
The image below, which you can click for more details, shows that Cyanotech had a debt of US $ 7.95 million at the end of December 2020, a reduction from US $ 8.87 million on a year. However, given that it has a cash reserve of $ 3.32 million, its net debt is less, at around $ 4.63 million.
How strong is Cyanotech’s balance sheet?
The latest balance sheet data shows that Cyanotech had liabilities of US $ 6.66 million due within one year and liabilities of US $ 7.30 million due thereafter. In return, he had $ 3.32 million in cash and $ 1.68 million in receivables due within 12 months. Its liabilities therefore total US $ 8.95 million more than the combination of its cash and short-term receivables.
Cyanotech has a market cap of US $ 19.0 million, so it could most likely raise funds to improve its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky. When analyzing debt levels, the balance sheet is the obvious starting point. But it is Cyanotech’s profits that will influence the balance sheet in the future. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
Year over 12 months, Cyanotech reported revenue of US $ 32 million, a gain of 7.5%, although it reported no profit before interest and taxes. This rate of growth is a bit slow for our taste, but it takes all types to make a world.
During the last twelve months, Cyanotech recorded a loss of profit before interest and taxes (EBIT). To be precise, the EBIT loss amounted to 163,000 USD. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. Quite frankly, we believe the record is far from up to par, although it could improve over time. Surprisingly, we note that he actually reported positive free cash flow of US $ 1.3 million and profit of US $ 1.2 million. One could therefore argue that there is still a chance that he could put things on the right track. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Be aware that Cyanotech shows 5 warning signs in our investment analysis , you must know…
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash growth net stocks today.
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