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. Importantly, Aurora Mobile Limited (NASDAQ:JG) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does Aurora Mobile Carry?
The image below, which you can click on for greater detail, shows that at March 2019 Aurora Mobile had debt of CN¥214.5m, up from none in one year. But it also has CN¥464.9m in cash to offset that, meaning it has CN¥250.4m net cash.
How Healthy Is Aurora Mobile’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Aurora Mobile had liabilities of CN¥206.3m due within 12 months and liabilities of CN¥224.2m due beyond that. Offsetting these obligations, it had cash of CN¥464.9m as well as receivables valued at CN¥210.7m due within 12 months. So it can boast CN¥245.1m more liquid assets than total liabilities.
This surplus suggests that Aurora Mobile has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Aurora Mobile boasts net cash, so it’s fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Aurora Mobile’s ability to maintain a healthy balance sheet going forward. 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, Aurora Mobile reported revenue of CN¥818m, which is a gain of 116%. So there’s no doubt that shareholders are cheering for growth
So How Risky Is Aurora Mobile?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Aurora Mobile lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥157m of cash and made a loss of CN¥81m. While this does make the company a bit risky, it’s important to remember it has net cash of CN¥465m. That means it could keep spending at its current rate for more than two years. Importantly, Aurora Mobile’s revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Aurora Mobile’s profit, revenue, and operating cashflow have changed over the last few years.
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.
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