Health Check: How Prudently Does Aurora Spine (CVE:ASG) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Aurora Spine Corporation (CVE:ASG) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Aurora Spine

What Is Aurora Spine's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Aurora Spine had US$2.29m of debt, an increase on US$2.17m, over one year. However, it does have US$3.17m in cash offsetting this, leading to net cash of US$886.6k.

How Healthy Is Aurora Spine's Balance Sheet?

We can see from the most recent balance sheet that Aurora Spine had liabilities of US$2.63m falling due within a year, and liabilities of US$2.37m due beyond that. Offsetting these obligations, it had cash of US$3.17m as well as receivables valued at US$2.67m due within 12 months. So it can boast US$846.4k more liquid assets than total liabilities.

This short term liquidity is a sign that Aurora Spine could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Aurora Spine has more cash than debt is arguably a good indication that it can manage its debt safely. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to US$11m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Aurora Spine?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Aurora Spine lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$2.8m of cash and made a loss of US$2.4m. However, it has net cash of US$886.6k, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Aurora Spine may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. Be aware that Aurora Spine is showing 4 warning signs in our investment analysis , and 1 of those is concerning...

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.