Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that SomnoMed Limited (ASX:SOM) 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 SomnoMed

How Much Debt Does SomnoMed Carry?

The image below, which you can click on for greater detail, shows that SomnoMed had debt of AU$2.35m at the end of June 2021, a reduction from AU$7.46m over a year. But it also has AU$21.1m in cash to offset that, meaning it has AU$18.8m net cash.

How Strong Is SomnoMed's Balance Sheet?

The latest balance sheet data shows that SomnoMed had liabilities of AU$16.2m due within a year, and liabilities of AU$7.81m falling due after that. On the other hand, it had cash of AU$21.1m and AU$8.22m worth of receivables due within a year. So it can boast AU$5.33m more liquid assets than total liabilities.

This short term liquidity is a sign that SomnoMed could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that SomnoMed has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SomnoMed'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.

In the last year SomnoMed wasn't profitable at an EBIT level, but managed to grow its revenue by 9.4%, to AU$63m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.