Is Acumentis Group (ASX:ACU) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Acumentis Group Limited (ASX:ACU) does use debt in its business. But the real question is whether this debt is making the company risky.

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.

Check out our latest analysis for Acumentis Group

What Is Acumentis Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Acumentis Group had AU$2.60m of debt in June 2021, down from AU$3.90m, one year before. However, it does have AU$3.70m in cash offsetting this, leading to net cash of AU$1.10m.

A Look At Acumentis Group's Liabilities

According to the last reported balance sheet, Acumentis Group had liabilities of AU$10.1m due within 12 months, and liabilities of AU$4.05m due beyond 12 months. On the other hand, it had cash of AU$3.70m and AU$4.56m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$5.88m.

This deficit isn't so bad because Acumentis Group is worth AU$26.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Acumentis Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Acumentis Group made a loss at the EBIT level, last year, but improved that to positive EBIT of AU$147k in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Acumentis Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Acumentis Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Acumentis Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Acumentis Group does have more liabilities than liquid assets, it also has net cash of AU$1.10m. The cherry on top was that in converted 3,177% of that EBIT to free cash flow, bringing in AU$4.7m. So we are not troubled with Acumentis Group's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Acumentis Group (of which 1 can't be ignored!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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