Is AdAlta (ASX:1AD) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, AdAlta Limited (ASX:1AD) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 AdAlta

How Much Debt Does AdAlta Carry?

As you can see below, AdAlta had AU$2.61m of debt at June 2024, down from AU$4.01m a year prior. However, it does have AU$3.13m in cash offsetting this, leading to net cash of AU$528.3k.

How Healthy Is AdAlta's Balance Sheet?

The latest balance sheet data shows that AdAlta had liabilities of AU$2.22m due within a year, and liabilities of AU$1.32m falling due after that. On the other hand, it had cash of AU$3.13m and AU$1.82m worth of receivables due within a year. So it can boast AU$1.41m more liquid assets than total liabilities.

This surplus suggests that AdAlta has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that AdAlta 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 it is AdAlta'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.

Since AdAlta doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is AdAlta?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that AdAlta had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$5.3m of cash and made a loss of AU$5.4m. With only AU$528.3k on the balance sheet, it would appear that its going to need to raise capital again 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. 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. Be aware that AdAlta is showing 4 warning signs in our investment analysis , and 2 of those can't be ignored...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.