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. 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. As with many other companies AquaBounty Technologies, Inc. (NASDAQ:AQB) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is AquaBounty Technologies's Debt?
The image below, which you can click on for greater detail, shows that at June 2019 AquaBounty Technologies had debt of US$4.63m, up from US$2.99m in one year. But it also has US$10.4m in cash to offset that, meaning it has US$5.79m net cash.
How Healthy Is AquaBounty Technologies's Balance Sheet?
We can see from the most recent balance sheet that AquaBounty Technologies had liabilities of US$2.18m falling due within a year, and liabilities of US$4.87m due beyond that. Offsetting these obligations, it had cash of US$10.4m as well as receivables valued at US$109.9k due within 12 months. So it can boast US$3.47m more liquid assets than total liabilities.
This short term liquidity is a sign that AquaBounty Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that AquaBounty 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 ultimately the future profitability of the business will decide if AquaBounty Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Since AquaBounty Technologies doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.
So How Risky Is AquaBounty Technologies?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months AquaBounty Technologies lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$12m of cash and made a loss of US$14m. With only US$5.79m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that AquaBounty Technologies has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. For riskier companies like AquaBounty Technologies I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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