Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Aurora Spine Corporation (CVE:ASG) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Aurora Spine
How Much Debt Does Aurora Spine Carry?
As you can see below, at the end of June 2023, Aurora Spine had US$2.49m of debt, up from US$2.35m a year ago. Click the image for more detail. However, because it has a cash reserve of US$386.6k, its net debt is less, at about US$2.10m.
How Strong Is Aurora Spine's Balance Sheet?
We can see from the most recent balance sheet that Aurora Spine had liabilities of US$3.27m falling due within a year, and liabilities of US$3.39m due beyond that. Offsetting this, it had US$386.6k in cash and US$3.47m in receivables that were due within 12 months. So it has liabilities totalling US$2.80m more than its cash and near-term receivables, combined.
Since publicly traded Aurora Spine shares are worth a total of US$19.0m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. 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.
Over 12 months, Aurora Spine reported revenue of US$14m, which is a gain of 2.3%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months Aurora Spine produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$1.9m. 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. 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$780k in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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 2 of those are potentially serious...
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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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.
About TSXV:ASG
Aurora Spine
Through its subsidiary, Aurora Spine, Inc., engages in the development and distribution of minimally invasive interspinous fusion systems and devices in Canada.
Excellent balance sheet slight.