Here's Why Acumentis Group (ASX:ACU) Can Afford Some Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Acumentis Group Limited (ASX:ACU) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Acumentis Group

How Much Debt Does Acumentis Group Carry?

The image below, which you can click on for greater detail, shows that Acumentis Group had debt of AU$3.90m at the end of June 2020, a reduction from AU$5.25m over a year. However, because it has a cash reserve of AU$1.86m, its net debt is less, at about AU$2.05m.

How Strong Is Acumentis Group's Balance Sheet?

The latest balance sheet data shows that Acumentis Group had liabilities of AU$8.91m due within a year, and liabilities of AU$5.62m falling due after that. Offsetting these obligations, it had cash of AU$1.86m as well as receivables valued at AU$4.67m due within 12 months. So it has liabilities totalling AU$8.00m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Acumentis Group has a market capitalization of AU$21.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Acumentis Group will need earnings to service that debt. 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.

Over 12 months, Acumentis Group made a loss at the EBIT level, and saw its revenue drop to AU$37m, which is a fall of 13%. We would much prefer see growth.

Caveat Emptor

While Acumentis Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable AU$4.6m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through AU$1.8m of cash over the last year. So in short it's a really risky stock. 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. To that end, you should learn about the 4 warning signs we've spotted with Acumentis Group (including 2 which is are significant) .

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. 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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