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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Aspen Aerogels, Inc. (NYSE:ASPN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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 Aspen Aerogels's Net Debt?
The image below, which you can click on for greater detail, shows that Aspen Aerogels had debt of US$2.89m at the end of June 2019, a reduction from US$3.75m over a year. But it also has US$3.32m in cash to offset that, meaning it has US$437.0k net cash.
A Look At Aspen Aerogels's Liabilities
We can see from the most recent balance sheet that Aspen Aerogels had liabilities of US$24.9m falling due within a year, and liabilities of US$16.5m due beyond that. On the other hand, it had cash of US$3.32m and US$22.2m worth of receivables due within a year. So it has liabilities totalling US$15.9m more than its cash and near-term receivables, combined.
Of course, Aspen Aerogels has a market capitalization of US$154.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Aspen Aerogels also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Aspen Aerogels can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Aspen Aerogels managed to grow its revenue by 8.1%, to US$117m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Aspen Aerogels?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Aspen Aerogels had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$7.6m and booked a US$32m accounting loss. With only US$3.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 Aspen Aerogels insider transactions.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.