Warren Buffett famously said, '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 Allegra Orthopaedics Limited (ASX:AMT) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Allegra Orthopaedics's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Allegra Orthopaedics had AU$84.4k of debt, an increase on none, over one year. But it also has AU$1.08m in cash to offset that, meaning it has AU$992.0k net cash.
How Strong Is Allegra Orthopaedics's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Allegra Orthopaedics had liabilities of AU$1.06m due within 12 months and liabilities of AU$61.1k due beyond that. Offsetting these obligations, it had cash of AU$1.08m as well as receivables valued at AU$1.16m due within 12 months. So it can boast AU$1.11m more liquid assets than total liabilities.
This short term liquidity is a sign that Allegra Orthopaedics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Allegra Orthopaedics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Allegra Orthopaedics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Allegra Orthopaedics actually shrunk its revenue by 2.3%, to AU$5.1m. We would much prefer see growth.
So How Risky Is Allegra Orthopaedics?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Allegra Orthopaedics had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of AU$1.1m and booked a AU$836k accounting loss. With only AU$1.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Allegra Orthopaedics's profit, revenue, and operating cashflow have changed over the last few years.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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