Agency Group Australia (ASX:AU1) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that The Agency Group Australia Limited (ASX:AU1) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Agency Group Australia

How Much Debt Does Agency Group Australia Carry?

As you can see below, at the end of June 2023, Agency Group Australia had AU$11.4m of debt, up from AU$5.00m a year ago. Click the image for more detail. On the flip side, it has AU$4.63m in cash leading to net debt of about AU$6.81m.

How Strong Is Agency Group Australia's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Agency Group Australia had liabilities of AU$21.7m due within 12 months and liabilities of AU$15.5m due beyond that. Offsetting this, it had AU$4.63m in cash and AU$12.7m in receivables that were due within 12 months. So its liabilities total AU$19.9m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's AU$15.4m 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Agency Group Australia'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 Agency Group Australia wasn't profitable at an EBIT level, but managed to grow its revenue by 5.9%, to AU$77m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Agency Group Australia had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$6.8m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous 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$1.5m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Agency Group Australia that you should be aware of before investing here.

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.

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.