Is A2B Australia (ASX:A2B) Using Debt In A Risky Way?

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 can see that A2B Australia Limited (ASX:A2B) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for A2B Australia

How Much Debt Does A2B Australia Carry?

As you can see below, at the end of December 2021, A2B Australia had AU$6.64m of debt, up from AU$1.93m a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$15.0m in cash, so it actually has AU$8.35m net cash.

How Strong Is A2B Australia's Balance Sheet?

The latest balance sheet data shows that A2B Australia had liabilities of AU$58.7m due within a year, and liabilities of AU$16.9m falling due after that. Offsetting this, it had AU$15.0m in cash and AU$52.7m in receivables that were due within 12 months. So its liabilities total AU$8.00m more than the combination of its cash and short-term receivables.

Of course, A2B Australia has a market capitalization of AU$135.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, A2B Australia boasts net cash, so it's fair to say it does not have a heavy debt load! 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 A2B Australia 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 A2B Australia had a loss before interest and tax, and actually shrunk its revenue by 16%, to AU$110m. We would much prefer see growth.

So How Risky Is A2B Australia?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year A2B Australia 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$9.2m and booked a AU$19m accounting loss. With only AU$8.35m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example A2B Australia has 3 warning signs (and 1 which makes us a bit uncomfortable) we think 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. 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.