Sound Energy (LON:SOU) Has Debt But No Earnings; Should You Worry?
Warren Buffett famously said, '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. Importantly, Sound Energy plc (LON:SOU) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Sound Energy Carry?
The image below, which you can click on for greater detail, shows that at June 2025 Sound Energy had debt of UK£37.6m, up from UK£35.5m in one year. However, it also had UK£2.83m in cash, and so its net debt is UK£34.8m.
How Strong Is Sound Energy's Balance Sheet?
According to the last reported balance sheet, Sound Energy had liabilities of UK£2.21m due within 12 months, and liabilities of UK£37.7m due beyond 12 months. Offsetting this, it had UK£2.83m in cash and UK£2.86m in receivables that were due within 12 months. So its liabilities total UK£34.3m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the UK£19.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Sound Energy would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sound Energy 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.
See our latest analysis for Sound Energy
Given its lack of meaningful operating revenue, Sound Energy shareholders no doubt hope it can fund itself until it can sell some combustibles.
Caveat Emptor
Over the last twelve months Sound Energy produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping UK£3.7m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of UK£9.6m over the last twelve months. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 6 warning signs we've spotted with Sound Energy (including 3 which are a bit concerning) .
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.