Would Aurora Spine (CVE:ASG) Be Better Off With Less 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.' 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. As with many other companies Aurora Spine Corporation (CVE:ASG) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Aurora Spine

How Much Debt Does Aurora Spine Carry?

The image below, which you can click on for greater detail, shows that at March 2022 Aurora Spine had debt of US$2.31m, up from US$2.20m in one year. However, it does have US$1.44m in cash offsetting this, leading to net debt of about US$875.4k.

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$3.00m due within 12 months and liabilities of US$2.35m due beyond that. Offsetting this, it had US$1.44m in cash and US$3.69m in receivables that were due within 12 months. So it has liabilities totalling US$225.4k more than its cash and near-term receivables, combined.

This state of affairs indicates that Aurora Spine's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$25.1m company is struggling for cash, we still think it's worth monitoring its balance sheet. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Aurora Spine wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to US$12m. 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. Indeed, it lost US$2.4m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$4.0m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Aurora Spine (including 1 which is significant) .

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.

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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.