Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Sonim Technologies, Inc. (NASDAQ:SONM) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.
What Is Sonim Technologies's Debt?
As you can see below, at the end of June 2019, Sonim Technologies had US$13.3m of debt, up from US$10.7m a year ago. Click the image for more detail. But it also has US$15.7m in cash to offset that, meaning it has US$2.40m net cash.
How Strong Is Sonim Technologies's Balance Sheet?
We can see from the most recent balance sheet that Sonim Technologies had liabilities of US$36.8m falling due within a year, and liabilities of US$14.0m due beyond that. On the other hand, it had cash of US$15.7m and US$31.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.85m.
Given Sonim Technologies has a market capitalization of US$179.8m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Sonim Technologies 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 it is future earnings, more than anything, that will determine Sonim Technologies'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, Sonim Technologies reported revenue of US$156m, which is a gain of 61%. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Sonim Technologies?
Although Sonim Technologies had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$2.2m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The good news for Sonim Technologies shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Sonim Technologies insider transactions.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.