David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Aspen Group, Inc. (NASDAQ:ASPU) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Aspen Group's Debt?
The image below, which you can click on for greater detail, shows that at April 2019 Aspen Group had debt of US$9.70m, up from US$2.05m in one year. However, it also had US$9.52m in cash, and so its net debt is US$177.3k.
A Look At Aspen Group's Liabilities
The latest balance sheet data shows that Aspen Group had liabilities of US$6.35m due within a year, and liabilities of US$10.4m falling due after that. Offsetting this, it had US$9.52m in cash and US$10.7m in receivables that were due within 12 months. So it actually has US$3.43m more liquid assets than total liabilities.
This short term liquidity is a sign that Aspen Group could probably pay off its debt with ease, as its balance sheet is far from stretched. But either way, Aspen Group has virtually no net debt, so it's fair to say it does not have a heavy debt load! 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$34m, which is a gain of 55%. With any luck the company will be able to grow its way to profitability.
Even though Aspen Group managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping US$9.1m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. For riskier companies like Aspen Group 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.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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