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 Akasol AG (ETR:ASL) 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Akasol's Net Debt?
The image below, which you can click on for greater detail, shows that Akasol had debt of €5.48m at the end of March 2019, a reduction from €7.99m over a year. But on the other hand it also has €46.4m in cash, leading to a €41.0m net cash position.
How Strong Is Akasol's Balance Sheet?
According to the last reported balance sheet, Akasol had liabilities of €13.8m due within 12 months, and liabilities of €4.58m due beyond 12 months. On the other hand, it had cash of €46.4m and €7.96m worth of receivables due within a year. So it actually has €36.1m more liquid assets than total liabilities.
This short term liquidity is a sign that Akasol could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Akasol has more cash than debt is arguably a good indication that it can manage its debt safely.
And we also note warmly that Akasol grew its EBIT by 13% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Akasol 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Akasol has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Akasol burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
While we empathize with investors who find debt concerning, you should keep in mind that Akasol has net cash of €41m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 13% in the last twelve months. So we are not troubled with Akasol's debt use. Even though Akasol lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check outhow earnings have been trending over the last few years.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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