Is Angel Seafood Holdings (ASX:AS1) A Risky Investment?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Angel Seafood Holdings Limited (ASX:AS1) does carry debt. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
View our latest analysis for Angel Seafood Holdings
What Is Angel Seafood Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 Angel Seafood Holdings had AU$4.47m of debt, an increase on AU$1.56m, over one year. However, it does have AU$258.8k in cash offsetting this, leading to net debt of about AU$4.21m.
How Strong Is Angel Seafood Holdings's Balance Sheet?
According to the last reported balance sheet, Angel Seafood Holdings had liabilities of AU$1.45m due within 12 months, and liabilities of AU$3.32m due beyond 12 months. Offsetting these obligations, it had cash of AU$258.8k as well as receivables valued at AU$767.8k due within 12 months. So it has liabilities totalling AU$3.74m more than its cash and near-term receivables, combined.
Since publicly traded Angel Seafood Holdings shares are worth a total of AU$28.3m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Angel Seafood Holdings'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.
In the last year Angel Seafood Holdings managed to grow its revenue by 47%, to AU$3.1m. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Despite the top line growth, Angel Seafood Holdings still had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost AU$2.3m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through AU$6.0m of cash over the last year. So in short it's a really risky stock. For riskier companies like Angel Seafood Holdings I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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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.
