Is Agency Group Australia (ASX:AU1) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, The Agency Group Australia Limited (ASX:AU1) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

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What Is Agency Group Australia's Debt?

The image below, which you can click on for greater detail, shows that Agency Group Australia had debt of AU$5.00m at the end of June 2022, a reduction from AU$9.88m over a year. But it also has AU$8.22m in cash to offset that, meaning it has AU$3.22m net cash.

A Look At Agency Group Australia's Liabilities

The latest balance sheet data shows that Agency Group Australia had liabilities of AU$28.2m due within a year, and liabilities of AU$3.01m falling due after that. Offsetting these obligations, it had cash of AU$8.22m as well as receivables valued at AU$11.1m due within 12 months. So it has liabilities totalling AU$11.9m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of AU$16.3m, so it does suggest shareholders should keep an eye on Agency Group Australia's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Agency Group Australia also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Agency Group Australia 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, Agency Group Australia reported revenue of AU$73m, which is a gain of 24%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Agency Group Australia?

Although Agency Group Australia had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of AU$1.6m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The good news for Agency Group Australia shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Agency Group Australia , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.