Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that SunCar Technology Group Inc. (NASDAQ:SDA) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is SunCar Technology Group's Debt?
As you can see below, SunCar Technology Group had US$83.0m of debt at December 2023, down from US$115.5m a year prior. However, it also had US$52.5m in cash, and so its net debt is US$30.6m.
A Look At SunCar Technology Group's Liabilities
Zooming in on the latest balance sheet data, we can see that SunCar Technology Group had liabilities of US$124.4m due within 12 months and liabilities of US$30.9m due beyond that. Offsetting this, it had US$52.5m in cash and US$58.9m in receivables that were due within 12 months. So its liabilities total US$43.9m more than the combination of its cash and short-term receivables.
Since publicly traded SunCar Technology Group shares are worth a total of US$722.1m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SunCar Technology Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year SunCar Technology Group wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to US$364m. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Despite the top line growth, SunCar Technology Group still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$15m 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. However, it doesn't help that it burned through US$33m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for SunCar Technology Group that you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.