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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 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. As with many other companies Advanced Emissions Solutions, Inc. (NASDAQ:ADES) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Advanced Emissions Solutions's Debt?
The image below, which you can click on for greater detail, shows that Advanced Emissions Solutions had debt of US$3.31m at the end of June 2021, a reduction from US$29.7m over a year. But it also has US$41.3m in cash to offset that, meaning it has US$38.0m net cash.
How Healthy Is Advanced Emissions Solutions' Balance Sheet?
The latest balance sheet data shows that Advanced Emissions Solutions had liabilities of US$27.2m due within a year, and liabilities of US$15.1m falling due after that. Offsetting this, it had US$41.3m in cash and US$15.2m in receivables that were due within 12 months. So it can boast US$14.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Advanced Emissions Solutions could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Advanced Emissions Solutions has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Advanced Emissions Solutions 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.
Over 12 months, Advanced Emissions Solutions reported revenue of US$79m, which is a gain of 33%, 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 Advanced Emissions Solutions?
While Advanced Emissions Solutions lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$36m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Keeping in mind its 33% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Advanced Emissions Solutions (including 1 which doesn't sit too well with us) .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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.
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