Amaero International (ASX:3DA) Has Debt But No Earnings; Should You Worry?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Amaero International Ltd (ASX:3DA) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Amaero International

What Is Amaero International's Debt?

As you can see below, at the end of June 2022, Amaero International had AU$2.81m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$11.1m in cash, so it actually has AU$8.31m net cash.

How Healthy Is Amaero International's Balance Sheet?

We can see from the most recent balance sheet that Amaero International had liabilities of AU$1.96m falling due within a year, and liabilities of AU$5.23m due beyond that. On the other hand, it had cash of AU$11.1m and AU$366.1k worth of receivables due within a year. So it can boast AU$4.30m more liquid assets than total liabilities.

This surplus suggests that Amaero International is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Amaero International has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Amaero International 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.

In the last year Amaero International wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to AU$570k. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Amaero International?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Amaero International had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$11m and booked a AU$8.6m accounting loss. With only AU$8.31m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Amaero International (at least 1 which is concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.