David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. 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 and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Advanced Human Imaging's Debt?
As you can see below, at the end of December 2021, Advanced Human Imaging had AU$2.26m of debt, up from AU$2.02m a year ago. Click the image for more detail. But on the other hand it also has AU$12.3m in cash, leading to a AU$10.0m net cash position.
How Healthy Is Advanced Human Imaging's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Advanced Human Imaging had liabilities of AU$3.61m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of AU$12.3m as well as receivables valued at AU$1.05m due within 12 months. So it can boast AU$9.72m more liquid assets than total liabilities.
It's good to see that Advanced Human Imaging has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Advanced Human Imaging boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Advanced Human Imaging can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
It seems likely shareholders hope that Advanced Human Imaging can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.
So How Risky Is Advanced Human Imaging?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Advanced Human Imaging lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$6.5m of cash and made a loss of AU$23m. Given it only has net cash of AU$10.0m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 4 warning signs for Advanced Human Imaging (1 is a bit unpleasant!) that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.