Stock Analysis

Is A2Z Smart Technologies (CVE:AZ) Using Too Much Debt?

TSXV:AZ
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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 A2Z Smart Technologies Corp. (CVE:AZ) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for A2Z Smart Technologies

How Much Debt Does A2Z Smart Technologies Carry?

As you can see below, at the end of December 2022, A2Z Smart Technologies had US$1.74m of debt, up from US$641.0k a year ago. Click the image for more detail. But it also has US$2.62m in cash to offset that, meaning it has US$872.0k net cash.

debt-equity-history-analysis
TSXV:AZ Debt to Equity History March 30th 2023

How Healthy Is A2Z Smart Technologies' Balance Sheet?

We can see from the most recent balance sheet that A2Z Smart Technologies had liabilities of US$6.24m falling due within a year, and liabilities of US$3.57m due beyond that. Offsetting these obligations, it had cash of US$2.62m as well as receivables valued at US$2.27m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$4.92m.

Since publicly traded A2Z Smart Technologies shares are worth a total of US$33.3m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, A2Z Smart Technologies 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 it is future earnings, more than anything, that will determine A2Z Smart Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, A2Z Smart Technologies reported revenue of US$9.4m, which is a gain of 248%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is A2Z Smart Technologies?

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 A2Z Smart Technologies lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$10m and booked a US$18m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$872.0k. That kitty means the company can keep spending for growth for at least two years, at current rates. Importantly, A2Z Smart Technologies's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 6 warning signs with A2Z Smart Technologies (at least 2 which are potentially serious) , 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.

Valuation is complex, but we're helping make it simple.

Find out whether A2Z Smart Technologies is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.