Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk'. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Sonim Technologies, Inc. (NASDAQ:SONM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Sonim Technologies's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Sonim Technologies had US$9.94m of debt, an increase on US$13.5, over one year. However, its balance sheet shows it holds US$16.3m in cash, so it actually has US$6.41m net cash.
How Strong Is Sonim Technologies's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Sonim Technologies had liabilities of US$29.6m due within 12 months and liabilities of US$10.8m due beyond that. Offsetting these obligations, it had cash of US$16.3m as well as receivables valued at US$17.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$6.62m.
Given Sonim Technologies has a market capitalization of US$75.1m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Sonim Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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$146m, which is a gain of 25%, 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.
So How Risky Is Sonim Technologies?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Sonim Technologies had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$25m and booked a US$16m accounting loss. Given it only has net cash of US$6.41m, the company may need to raise more capital if it doesn't reach break-even soon. Sonim Technologies's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Sonim Technologies you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.