The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Sanara MedTech Inc. (NASDAQ:SMTI) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Sanara MedTech's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Sanara MedTech had US$9.69m of debt, an increase on none, over one year. However, it also had US$6.24m in cash, and so its net debt is US$3.45m.
A Look At Sanara MedTech's Liabilities
The latest balance sheet data shows that Sanara MedTech had liabilities of US$13.2m due within a year, and liabilities of US$18.1m falling due after that. Offsetting these obligations, it had cash of US$6.24m as well as receivables valued at US$7.50m due within 12 months. So it has liabilities totalling US$17.6m more than its cash and near-term receivables, combined.
Of course, Sanara MedTech has a market capitalization of US$329.8m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Sanara MedTech has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sanara MedTech'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.
Over 12 months, Sanara MedTech reported revenue of US$63m, which is a gain of 67%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Even though Sanara MedTech managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost US$8.3m at the EBIT level. 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$3.3m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Sanara MedTech , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.