Is Astron (ASX:ATR) A Risky Investment?

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. Importantly, Astron Corporation Limited (ASX:ATR) does carry debt. But the real question is whether this debt is making the company risky.

Our free stock report includes 4 warning signs investors should be aware of before investing in Astron. Read for free now.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Astron Carry?

You can click the graphic below for the historical numbers, but it shows that Astron had AU$9.16m of debt in December 2024, down from AU$18.6m, one year before. However, it does have AU$19.6m in cash offsetting this, leading to net cash of AU$10.4m.

How Healthy Is Astron's Balance Sheet?

We can see from the most recent balance sheet that Astron had liabilities of AU$10.9m falling due within a year, and liabilities of AU$6.05m due beyond that. On the other hand, it had cash of AU$19.6m and AU$1.58m worth of receivables due within a year. So it can boast AU$4.22m more liquid assets than total liabilities.

This surplus suggests that Astron has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Astron has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Astron 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.

View our latest analysis for Astron

In the last year Astron had a loss before interest and tax, and actually shrunk its revenue by 28%, to AU$10m. That makes us nervous, to say the least.

So How Risky Is Astron?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Astron had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$14m and booked a AU$9.6m accounting loss. However, it has net cash of AU$10.4m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 4 warning signs with Astron (at least 1 which is significant) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.