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 Astrotech Corporation (NASDAQ:ASTC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Astrotech's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2020 Astrotech had US$2.50m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$4.66m in cash, so it actually has US$2.16m net cash.
How Healthy Is Astrotech's Balance Sheet?
The latest balance sheet data shows that Astrotech had liabilities of US$4.15m due within a year, and liabilities of US$711.0k falling due after that. Offsetting this, it had US$4.66m in cash and US$514.0k in receivables that were due within 12 months. So it can boast US$317.0k more liquid assets than total liabilities.
Having regard to Astrotech'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$21.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Astrotech 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 it is Astrotech's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
It seems likely shareholders hope that Astrotech can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.
So How Risky Is Astrotech?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Astrotech had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$6.9m of cash and made a loss of US$8.0m. Given it only has net cash of US$2.16m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Astrotech's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Astrotech is showing 4 warning signs in our investment analysis , and 2 of those can't be ignored...
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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