Yahoo Finance Does Sorrento Therapeutics (NASDAQ:SRNE) Have A Healthy Balance Sheet?
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Sorrento Therapeutics, Inc. (NASDAQ:SRNE) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Sorrento Therapeutics
What Is Sorrento Therapeutics's Net Debt?
The image below, which you can click on for greater detail, shows that Sorrento Therapeutics had debt of US$111.0m at the end of September 2021, a reduction from US$168.0m over a year. However, its balance sheet shows it holds US$162.7m in cash, so it actually has US$51.7m net cash.
A Look At Sorrento Therapeutics' Liabilities
According to the last reported balance sheet, Sorrento Therapeutics had liabilities of US$175.2m due within 12 months, and liabilities of US$446.3m due beyond 12 months. Offsetting this, it had US$162.7m in cash and US$16.5m in receivables that were due within 12 months. So it has liabilities totalling US$442.3m more than its cash and near-term receivables, combined.
Sorrento Therapeutics has a market capitalization of US$1.39b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Sorrento Therapeutics also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sorrento Therapeutics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Sorrento Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to US$51m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Sorrento Therapeutics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Sorrento Therapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$303m of cash and made a loss of US$355m. With only US$51.7m on the balance sheet, it would appear that its going to need to raise capital again 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. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Sorrento Therapeutics (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.
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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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.
