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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Aspen Group, Inc. (NASDAQ:ASPU) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Aspen Group's Debt?
The image below, which you can click on for greater detail, shows that Aspen Group had debt of US$8.59m at the end of July 2020, a reduction from US$9.76m over a year. But on the other hand it also has US$15.9m in cash, leading to a US$7.31m net cash position.
A Look At Aspen Group's Liabilities
The latest balance sheet data shows that Aspen Group had liabilities of US$11.4m due within a year, and liabilities of US$15.3m falling due after that. On the other hand, it had cash of US$15.9m and US$14.7m worth of receivables due within a year. So it actually has US$3.91m more liquid assets than total liabilities.
Having regard to Aspen Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$255.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Aspen Group 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 Aspen Group 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.
Over 12 months, Aspen Group reported revenue of US$54m, which is a gain of 45%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Aspen Group?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Aspen Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$8.0m of cash and made a loss of US$4.5m. However, it has net cash of US$7.31m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Aspen Group may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Aspen Group is showing 2 warning signs in our investment analysis , you should know about...
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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