- Oops!Something went wrong.Please try again later.
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 note that Aspen Group, Inc. (NASDAQ:ASPU) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Aspen Group's Debt?
You can click the graphic below for the historical numbers, but it shows that as of January 2020 Aspen Group had US$8.36m of debt, an increase on US$1.05m, over one year. However, it does have US$20.5m in cash offsetting this, leading to net cash of US$12.2m.
How Healthy Is Aspen Group's Balance Sheet?
The latest balance sheet data shows that Aspen Group had liabilities of US$12.2m due within a year, and liabilities of US$15.1m falling due after that. On the other hand, it had cash of US$20.5m and US$14.1m worth of receivables due within a year. So it actually has US$7.36m more liquid assets than total liabilities.
This surplus suggests that Aspen Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Aspen Group has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Aspen Group 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.
Over 12 months, Aspen Group reported revenue of US$45m, which is a gain of 46%, 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?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Aspen Group had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$9.2m of cash and made a loss of US$6.6m. However, it has net cash of US$12.2m, 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. 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. Be aware that Aspen Group is showing 2 warning signs in our investment analysis , you should know about...
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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.