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Is Akoustis Technologies (NASDAQ:AKTS) Using Debt In A Risky Way?

Simply Wall St

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Akoustis Technologies, Inc. (NASDAQ:AKTS) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Akoustis Technologies

What Is Akoustis Technologies's Net Debt?

As you can see below, at the end of March 2019, Akoustis Technologies had US$19.1m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$34.6m in cash, so it actually has US$15.5m net cash.

NasdaqCM:AKTS Historical Debt, August 22nd 2019

How Healthy Is Akoustis Technologies's Balance Sheet?

The latest balance sheet data shows that Akoustis Technologies had liabilities of US$2.80m due within a year, and liabilities of US$19.7m falling due after that. Offsetting this, it had US$34.6m in cash and US$223.4k in receivables that were due within 12 months. So it actually has US$12.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Akoustis Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Akoustis Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Akoustis Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Akoustis Technologies reported revenue of US$1.1m, which is a gain of 21%. With any luck the company will be able to grow its way to profitability.

So How Risky Is Akoustis Technologies?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Akoustis Technologies had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$23m and booked a US$30m accounting loss. But at least it has US$35m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Akoustis Technologies may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Akoustis Technologies insider transactions.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.