Is ActivEX (ASX:AIV) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that ActivEX Limited (ASX:AIV) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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.

View our latest analysis for ActivEX

What Is ActivEX's Net Debt?

You can click the graphic below for the historical numbers, but it shows that ActivEX had AU$2.78m of debt in June 2022, down from AU$3.64m, one year before. But it also has AU$3.03m in cash to offset that, meaning it has AU$243.8k net cash.

How Healthy Is ActivEX's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ActivEX had liabilities of AU$600.1k due within 12 months and liabilities of AU$2.78m due beyond that. On the other hand, it had cash of AU$3.03m and AU$600.0k worth of receivables due within a year. So it actually has AU$243.7k more liquid assets than total liabilities.

This short term liquidity is a sign that ActivEX could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that ActivEX has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ActivEX will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given its lack of meaningful operating revenue, investors are probably hoping that ActivEX finds some valuable resources, before it runs out of money.

So How Risky Is ActivEX?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months ActivEX lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$2.1m of cash and made a loss of AU$1.9m. Given it only has net cash of AU$243.8k, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example ActivEX has 6 warning signs (and 4 which don't sit too well with us) we think you should know about.

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.