Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Like many other companies Smart Sand, Inc. (NASDAQ: SND) uses debt. But the real question is whether this debt makes the business risky.

What risk does debt entail?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. 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 painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

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What is Smart Sand’s net debt?

You can click on the graph below for historical numbers, but it shows that Smart Sand had $ 27.3 million in debt as of March 2021, up from $ 37.1 million a year earlier. However, it has $ 11.4 million in cash offsetting that, which leads to net debt of around $ 15.9 million.

Is Smart Sand’s track record healthy?

Zooming in on the latest balance sheet data, we can see that Smart Sand had a liability of US $ 37.3 million owed within 12 months and a liability of US $ 94.4 million owed beyond that. In return, he had $ 11.4 million in cash and $ 66.9 million in receivables due within 12 months. Its liabilities therefore total $ 53.4 million more than the combination of its cash and short-term receivables.

Smart Sand has a market cap of US $ 119.2 million, so it could most likely raise funds to improve its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Smart Sand can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Over the past year, Smart Sand has recorded a loss before interest and taxes and actually reduced its income by 55%, to $ 102 million. To be frank, that doesn’t bode well.

Emptor Warning

While Smart Sand’s declining income is about as comforting as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less appealing. Indeed, he lost a very considerable amount of US $ 19 million in EBIT. 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. On the positive side, we note that EBIT for the past twelve months is worse than free cash flow of US $ 11 million and profit of US $ 34 million. So if we focus on these metrics, there seems to be a chance that the company will manage its debt without too much trouble. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 5 warning signs for Smart Sand (1 is significant) you must be aware.

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 net growth stocks today.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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