Is Aerometrex (ASX:AMX) Using Debt Sensibly?

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 note that Aerometrex Limited (ASX:AMX) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Aerometrex

What Is Aerometrex's Net Debt?

As you can see below, at the end of June 2024, Aerometrex had AU$2.82m of debt, up from AU$2.04m a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$8.31m in cash, so it actually has AU$5.49m net cash.

How Healthy Is Aerometrex's Balance Sheet?

The latest balance sheet data shows that Aerometrex had liabilities of AU$10.5m due within a year, and liabilities of AU$18.0m falling due after that. Offsetting these obligations, it had cash of AU$8.31m as well as receivables valued at AU$3.48m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$16.7m.

While this might seem like a lot, it is not so bad since Aerometrex has a market capitalization of AU$31.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Aerometrex boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Aerometrex 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.

In the last year Aerometrex had a loss before interest and tax, and actually shrunk its revenue by 2.4%, to AU$25m. That's not what we would hope to see.

So How Risky Is Aerometrex?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Aerometrex lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$1.4m of cash and made a loss of AU$4.7m. But the saving grace is the AU$5.49m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Aerometrex (including 1 which doesn't sit too well with us) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.