The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Ainsworth Game Technology Limited (ASX:AGI) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Ainsworth Game Technology's Net Debt?
As you can see below, Ainsworth Game Technology had AU$37.2m of debt at June 2021, down from AU$43.9m a year prior. However, it does have AU$42.4m in cash offsetting this, leading to net cash of AU$5.15m.
How Strong Is Ainsworth Game Technology's Balance Sheet?
According to the last reported balance sheet, Ainsworth Game Technology had liabilities of AU$46.7m due within 12 months, and liabilities of AU$58.5m due beyond 12 months. Offsetting this, it had AU$42.4m in cash and AU$84.3m in receivables that were due within 12 months. So it actually has AU$21.4m more liquid assets than total liabilities.
This surplus suggests that Ainsworth Game Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ainsworth Game Technology 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 ultimately the future profitability of the business will decide if Ainsworth Game Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Ainsworth Game Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 6.8%, to AU$160m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Ainsworth Game Technology?
Although Ainsworth Game Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of AU$18m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. For riskier companies like Ainsworth Game Technology I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
If you decide to trade Ainsworth Game Technology, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted
Valuation is complex, but we're helping make it simple.
Find out whether Ainsworth Game Technology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
Ainsworth Game Technology
Ainsworth Game Technology Limited designs, develops, manufactures, sells, distributes, and services electronic gaming machines, and other related equipment and services.
Flawless balance sheet with moderate growth potential.