Aurora Spine (CVE:ASG) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Aurora Spine Corporation (CVE:ASG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Aurora Spine

What Is Aurora Spine's Debt?

As you can see below, Aurora Spine had US$2.20m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$1.18m in cash offsetting this, leading to net debt of about US$1.02m.

How Strong Is Aurora Spine's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aurora Spine had liabilities of US$1.80m due within 12 months and liabilities of US$2.31m due beyond that. Offsetting this, it had US$1.18m in cash and US$2.03m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$900.8k.

Of course, Aurora Spine has a market capitalization of US$36.7m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Aurora Spine'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.

In the last year Aurora Spine had a loss before interest and tax, and actually shrunk its revenue by 19%, to US$8.6m. We would much prefer see growth.

Caveat Emptor

While Aurora Spine's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$1.2m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$229k in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. We've identified 1 warning sign with Aurora Spine , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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