Here's Why Aurora Spine (CVE:ASG) Can Afford Some Debt

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.' 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 is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Aurora Spine

What Is Aurora Spine's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Aurora Spine had debt of US$2.42m, up from US$2.29m in one year. However, it also had US$423.4k in cash, and so its net debt is US$1.99m.

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$3.03m due within 12 months and liabilities of US$2.78m due beyond that. Offsetting these obligations, it had cash of US$423.4k as well as receivables valued at US$3.67m due within 12 months. So it has liabilities totalling US$1.72m more than its cash and near-term receivables, combined.

Of course, Aurora Spine has a market capitalization of US$14.7m, 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. 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 Aurora Spine 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 Aurora Spine wasn't profitable at an EBIT level, but managed to grow its revenue by 41%, to US$15m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Aurora Spine's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at US$1.3m. 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. However, it doesn't help that it burned through US$2.4m of cash over the last year. So in short it's a really risky stock. 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. Case in point: We've spotted 4 warning signs for Aurora Spine you should be aware of, and 2 of them are potentially serious.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.