Advanced Human Imaging (ASX:AHI) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Advanced Human Imaging Limited (ASX:AHI) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Advanced Human Imaging

What Is Advanced Human Imaging's Net Debt?

As you can see below, at the end of December 2020, Advanced Human Imaging had AU$2.02m of debt, up from AU$1.46m a year ago. Click the image for more detail. However, it does have AU$4.76m in cash offsetting this, leading to net cash of AU$2.73m.

How Healthy Is Advanced Human Imaging's Balance Sheet?

We can see from the most recent balance sheet that Advanced Human Imaging had liabilities of AU$2.90m falling due within a year, and liabilities of AU$97.8k due beyond that. Offsetting these obligations, it had cash of AU$4.76m as well as receivables valued at AU$87.8k due within 12 months. So it can boast AU$1.85m more liquid assets than total liabilities.

Having regard to Advanced Human Imaging's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the AU$276.1m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Advanced Human Imaging has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Advanced Human Imaging 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.

In the last year Advanced Human Imaging wasn't profitable at an EBIT level, but managed to grow its revenue by 389%, to AU$724k. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Advanced Human Imaging?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Advanced Human Imaging had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$2.2m and booked a AU$7.9m accounting loss. Given it only has net cash of AU$2.73m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Advanced Human Imaging's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. 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 Advanced Human Imaging (of which 2 are a bit unpleasant!) you should know about.

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. 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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