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. We note that Arcimoto, Inc. (NASDAQ:FUV) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Arcimoto Carry?
The image below, which you can click on for greater detail, shows that at June 2019 Arcimoto had debt of US$2.84m, up from US$1.67m in one year. However, because it has a cash reserve of US$1.25m, its net debt is less, at about US$1.59m.
How Strong Is Arcimoto's Balance Sheet?
The latest balance sheet data shows that Arcimoto had liabilities of US$5.42m due within a year, and liabilities of US$1.45m falling due after that. Offsetting this, it had US$1.25m in cash and US$20.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$5.61m.
Of course, Arcimoto has a market capitalization of US$42.6m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Arcimoto'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.
Given it has no significant operating revenue at the moment, shareholders will be hoping Arcimoto can make progress and gain better traction for the business, before it runs low on cash.
While Arcimoto's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$13m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 US$15m of cash over the last year. So suffice it to say we consider the stock very risky. For riskier companies like Arcimoto 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 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.
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