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 real question is whether this debt is making the company risky.
When Is Debt A Problem?
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 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.
What Is Ainsworth Game Technology's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Ainsworth Game Technology had AU$39.4m of debt, an increase on AU$29.3m, over one year. On the flip side, it has AU$24.0m in cash leading to net debt of about AU$15.5m.
A Look At Ainsworth Game Technology's Liabilities
According to the last reported balance sheet, Ainsworth Game Technology had liabilities of AU$79.2m due within 12 months, and liabilities of AU$21.0m due beyond 12 months. Offsetting this, it had AU$24.0m in cash and AU$73.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$2.95m.
This state of affairs indicates that Ainsworth Game Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the AU$271.1m company is short on cash, but still worth keeping an eye on the balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. 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.
Over 12 months, Ainsworth Game Technology made a loss at the EBIT level, and saw its revenue drop to AU$114m, which is a fall of 49%. That makes us nervous, to say the least.
Not only did Ainsworth Game Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping AU$54m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$2.2m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. For instance, we've identified 1 warning sign for Ainsworth Game Technology that you should be aware of.
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.
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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.