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 can see that Aurora Spine Corporation (CVE:ASG) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Aurora Spine's Debt?
As you can see below, at the end of June 2019, Aurora Spine had US$2.07m of debt, up from US$1.96m a year ago. Click the image for more detail. However, because it has a cash reserve of US$389.6k, its net debt is less, at about US$1.68m.
How Healthy Is Aurora Spine's Balance Sheet?
According to the last reported balance sheet, Aurora Spine had liabilities of US$2.26m due within 12 months, and liabilities of US$2.41m due beyond 12 months. Offsetting these obligations, it had cash of US$389.6k as well as receivables valued at US$2.38m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.91m.
Of course, Aurora Spine has a market capitalization of US$14.7m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Aurora Spine will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Aurora Spine reported revenue of US$11m, which is a gain of 71%, 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.
Despite the top line growth, Aurora Spine still had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost US$13k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$199k. So we do think this stock is quite risky. For riskier companies like Aurora Spine 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.
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.
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