Ainsworth Game Technology (ASX:AGI) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Ainsworth Game Technology Limited (ASX:AGI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Ainsworth Game Technology

How Much Debt Does Ainsworth Game Technology Carry?

As you can see below, Ainsworth Game Technology had AU$14.0m of debt at December 2021, down from AU$39.4m a year prior. However, it does have AU$46.3m in cash offsetting this, leading to net cash of AU$32.2m.

How Strong Is Ainsworth Game Technology's Balance Sheet?

The latest balance sheet data shows that Ainsworth Game Technology had liabilities of AU$49.0m due within a year, and liabilities of AU$30.8m falling due after that. Offsetting these obligations, it had cash of AU$46.3m as well as receivables valued at AU$76.8m due within 12 months. So it can boast AU$43.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Ainsworth Game Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Ainsworth Game Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Ainsworth Game Technology made a loss at the EBIT level, last year, it was also good to see that it generated AU$36m in EBIT over the last twelve months. 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 Ainsworth Game Technology'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ainsworth Game Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Ainsworth Game Technology actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Ainsworth Game Technology has AU$32.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of AU$45m, being 125% of its EBIT. So we don't think Ainsworth Game Technology's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Ainsworth Game Technology .

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.

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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.