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Health Check: How Prudently Does Sorrento Therapeutics (NASDAQ:SRNE) Use Debt?

·4 min read

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.' 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 Sorrento Therapeutics, Inc. (NASDAQ:SRNE) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sorrento Therapeutics

How Much Debt Does Sorrento Therapeutics Carry?

As you can see below, at the end of March 2022, Sorrento Therapeutics had US$153.0m of debt, up from US$101.7m a year ago. Click the image for more detail. However, it does have US$270.7m in cash offsetting this, leading to net cash of US$117.6m.


How Strong Is Sorrento Therapeutics' Balance Sheet?

According to the last reported balance sheet, Sorrento Therapeutics had liabilities of US$204.2m due within 12 months, and liabilities of US$425.2m due beyond 12 months. Offsetting these obligations, it had cash of US$270.7m as well as receivables valued at US$24.7m due within 12 months. So it has liabilities totalling US$334.1m more than its cash and near-term receivables, combined.

Sorrento Therapeutics has a market capitalization of US$987.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Sorrento Therapeutics boasts net cash, 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 ultimately the future profitability of the business will decide if Sorrento Therapeutics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Sorrento Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to US$57m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Sorrento Therapeutics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Sorrento Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$362m of cash and made a loss of US$472m. Given it only has net cash of US$117.6m, the company may need to raise more capital if it doesn't reach break-even soon. Sorrento Therapeutics's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. We've identified 4 warning signs with Sorrento Therapeutics (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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