Is Australian Dairy Nutritionals Group (ASX:AHF) Weighed On By Its Debt Load?

Warren Buffett famously said, '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 Australian Dairy Nutritionals Group (ASX:AHF) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Australian Dairy Nutritionals Group

What Is Australian Dairy Nutritionals Group's Debt?

As you can see below, Australian Dairy Nutritionals Group had AU$5.98m of debt at June 2021, down from AU$12.1m a year prior. But on the other hand it also has AU$6.23m in cash, leading to a AU$247.6k net cash position.

How Strong Is Australian Dairy Nutritionals Group's Balance Sheet?

The latest balance sheet data shows that Australian Dairy Nutritionals Group had liabilities of AU$8.72m due within a year, and liabilities of AU$407.7k falling due after that. Offsetting this, it had AU$6.23m in cash and AU$1.32m in receivables that were due within 12 months. So it has liabilities totalling AU$1.58m more than its cash and near-term receivables, combined.

Since publicly traded Australian Dairy Nutritionals Group shares are worth a total of AU$28.7m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Australian Dairy Nutritionals Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Australian Dairy Nutritionals Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Australian Dairy Nutritionals Group made a loss at the EBIT level, and saw its revenue drop to AU$22m, which is a fall of 3.4%. We would much prefer see growth.

So How Risky Is Australian Dairy Nutritionals Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Australian Dairy Nutritionals Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$7.1m of cash and made a loss of AU$6.4m. But at least it has AU$247.6k on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Australian Dairy Nutritionals Group (including 2 which can't be ignored) .

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.

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.

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