Does Agency Group Australia (ASX:AU1) Have A Healthy Balance Sheet?

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.' 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, The Agency Group Australia Limited (ASX:AU1) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Agency Group Australia

What Is Agency Group Australia's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Agency Group Australia had AU$11.9m of debt, an increase on AU$9.59m, over one year. However, it does have AU$4.41m in cash offsetting this, leading to net debt of about AU$7.47m.

A Look At Agency Group Australia's Liabilities

We can see from the most recent balance sheet that Agency Group Australia had liabilities of AU$20.4m falling due within a year, and liabilities of AU$16.3m due beyond that. On the other hand, it had cash of AU$4.41m and AU$12.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$19.4m.

This deficit casts a shadow over the AU$11.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Agency Group Australia would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. 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 16%, to AU$75m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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$3.5m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of AU$1.3m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Agency Group Australia is showing 2 warning signs in our investment analysis , and 1 of those is significant...

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.