Is AD1 Holdings (ASX:AD1) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, AD1 Holdings Limited (ASX:AD1) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for AD1 Holdings

What Is AD1 Holdings's Net Debt?

As you can see below, at the end of December 2021, AD1 Holdings had AU$3.83m of debt, up from none a year ago. Click the image for more detail. But it also has AU$4.62m in cash to offset that, meaning it has AU$783.2k net cash.

How Healthy Is AD1 Holdings' Balance Sheet?

We can see from the most recent balance sheet that AD1 Holdings had liabilities of AU$4.84m falling due within a year, and liabilities of AU$3.63m due beyond that. Offsetting these obligations, it had cash of AU$4.62m as well as receivables valued at AU$1.97m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$1.88m.

Given AD1 Holdings has a market capitalization of AU$12.2m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, AD1 Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is AD1 Holdings'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 AD1 Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 66%, to AU$6.3m. With any luck the company will be able to grow its way to profitability.

So How Risky Is AD1 Holdings?

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 AD1 Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$3.1m of cash and made a loss of AU$2.7m. Given it only has net cash of AU$783.2k, the company may need to raise more capital if it doesn't reach break-even soon. AD1 Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example AD1 Holdings has 4 warning signs (and 1 which shouldn't be ignored) 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.