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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.' 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 can see that AquaBounty Technologies, Inc. (NASDAQ:AQB) does use debt in its business. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 AquaBounty Technologies's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 AquaBounty Technologies had US$8.58m of debt, an increase on US$4.55m, over one year. But it also has US$39.0m in cash to offset that, meaning it has US$30.4m net cash.
How Healthy Is AquaBounty Technologies's Balance Sheet?
According to the last reported balance sheet, AquaBounty Technologies had liabilities of US$2.33m due within 12 months, and liabilities of US$8.73m due beyond 12 months. On the other hand, it had cash of US$39.0m and US$62.0k worth of receivables due within a year. So it actually has US$28.0m more liquid assets than total liabilities.
This surplus suggests that AquaBounty Technologies 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, AquaBounty Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! 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.
Given its lack of meaningful operating revenue, AquaBounty Technologies shareholders no doubt hope it can fund itself until it has a profitable product.
So How Risky Is AquaBounty Technologies?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that AquaBounty Technologies had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$17m and booked a US$14m accounting loss. Given it only has net cash of US$30.4m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for AquaBounty Technologies you should be aware of, and 2 of them don't sit too well with us.
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.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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