Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Astron Corporation Limited (ASX:ATR) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Astron
How Much Debt Does Astron Carry?
As you can see below, at the end of June 2020, Astron had AU$16.1m of debt, up from AU$11.0m a year ago. Click the image for more detail. On the flip side, it has AU$576.9k in cash leading to net debt of about AU$15.5m.
How Strong Is Astron's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Astron had liabilities of AU$29.3m due within 12 months and liabilities of AU$6.73m due beyond that. Offsetting these obligations, it had cash of AU$576.9k as well as receivables valued at AU$4.59m due within 12 months. So its liabilities total AU$30.8m more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's AU$23.9m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Astron'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 Astron wasn't profitable at an EBIT level, but managed to grow its revenue by 5.6%, to AU$8.4m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Astron had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping AU$4.8m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of AU$5.3m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. Take risks, for example - Astron has 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. 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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About ASX:ATR
Astron
Operates as a mineral mining and production company in Australia, China, and internationally.
Slight with mediocre balance sheet.