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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Ambition Group Limited (ASX:AMB) does carry debt. 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Ambition Group's Net Debt?
As you can see below, Ambition Group had AU$455.0k of debt at June 2019, down from AU$2.03m a year prior. However, it does have AU$1.79m in cash offsetting this, leading to net cash of AU$1.34m.
A Look At Ambition Group's Liabilities
We can see from the most recent balance sheet that Ambition Group had liabilities of AU$14.5m falling due within a year, and liabilities of AU$4.77m due beyond that. Offsetting this, it had AU$1.79m in cash and AU$18.9m in receivables that were due within 12 months. So it can boast AU$1.40m more liquid assets than total liabilities.
This surplus suggests that Ambition Group is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Ambition Group 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 Ambition Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Ambition Group managed to grow its revenue by 6.5%, to AU$112m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Ambition Group?
Although Ambition Group had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of AU$500k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 Ambition Group 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.
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