Would Ambertech (ASX:AMO) Be Better Off With Less Debt?

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 can see that Ambertech Limited (ASX:AMO) does use debt in its business. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Ambertech Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Ambertech had AU$9.76m of debt, an increase on AU$7.66m, over one year. On the flip side, it has AU$2.42m in cash leading to net debt of about AU$7.34m.

How Healthy Is Ambertech's Balance Sheet?

We can see from the most recent balance sheet that Ambertech had liabilities of AU$27.6m falling due within a year, and liabilities of AU$4.91m due beyond that. Offsetting these obligations, it had cash of AU$2.42m as well as receivables valued at AU$17.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$12.5m.

This is a mountain of leverage relative to its market capitalization of AU$15.7m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ambertech's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for Ambertech

Over 12 months, Ambertech made a loss at the EBIT level, and saw its revenue drop to AU$90m, which is a fall of 4.9%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Ambertech produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at AU$71k. 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of AU$491k. So in short it's a really risky stock. 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 3 warning signs for Ambertech (of which 1 doesn't sit too well with us!) you should know about.

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.