Is Indoor Skydive Australia Group (ASX:IDZ) Using Debt In A Risky Way?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Indoor Skydive Australia Group Limited (ASX:IDZ) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for Indoor Skydive Australia Group

How Much Debt Does Indoor Skydive Australia Group Carry?

The image below, which you can click on for greater detail, shows that Indoor Skydive Australia Group had debt of AU$10.4m at the end of June 2020, a reduction from AU$11.1m over a year. However, it also had AU$234.2k in cash, and so its net debt is AU$10.2m.

A Look At Indoor Skydive Australia Group's Liabilities

According to the last reported balance sheet, Indoor Skydive Australia Group had liabilities of AU$5.62m due within 12 months, and liabilities of AU$20.1m due beyond 12 months. Offsetting this, it had AU$234.2k in cash and AU$461.2k in receivables that were due within 12 months. So it has liabilities totalling AU$25.1m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the AU$4.71m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Indoor Skydive Australia Group would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Indoor Skydive Australia Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Indoor Skydive Australia Group had a loss before interest and tax, and actually shrunk its revenue by 33%, to AU$5.0m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Indoor Skydive Australia Group'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$2.7m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized AU$890k in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 6 warning signs we've spotted with Indoor Skydive Australia Group (including 3 which is don't sit too well with us) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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