Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Aqua Metals, Inc. (NASDAQ:AQMS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Aqua Metals's Debt?
As you can see below, Aqua Metals had US$8.82m of debt at June 2019, down from US$11.3m a year prior. But it also has US$27.3m in cash to offset that, meaning it has US$18.5m net cash.
How Strong Is Aqua Metals's Balance Sheet?
According to the last reported balance sheet, Aqua Metals had liabilities of US$8.65m due within 12 months, and liabilities of US$10.5m due beyond 12 months. Offsetting this, it had US$27.3m in cash and US$1.01m in receivables that were due within 12 months. So it actually has US$9.21m more liquid assets than total liabilities.
This short term liquidity is a sign that Aqua Metals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Aqua Metals boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Aqua Metals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Aqua Metals reported revenue of US$4.2m, which is a gain of 13%. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Aqua Metals?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Aqua Metals had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$32m of cash and made a loss of US$45m. With only US$27m 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 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 Aqua Metals insider transactions.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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 firstname.lastname@example.org. 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.