Ackroo (CVE:AKR) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Ackroo Inc. (CVE:AKR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Ackroo

How Much Debt Does Ackroo Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Ackroo had CA$4.15m of debt, an increase on CA$3.81m, over one year. However, it also had CA$1.50m in cash, and so its net debt is CA$2.65m.

How Healthy Is Ackroo's Balance Sheet?

We can see from the most recent balance sheet that Ackroo had liabilities of CA$1.49m falling due within a year, and liabilities of CA$5.00m due beyond that. Offsetting this, it had CA$1.50m in cash and CA$431.3k in receivables that were due within 12 months. So its liabilities total CA$4.56m more than the combination of its cash and short-term receivables.

Since publicly traded Ackroo shares are worth a total of CA$23.2m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ackroo 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 Ackroo wasn't profitable at an EBIT level, but managed to grow its revenue by 3.8%, to CA$5.8m. 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 Ackroo produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$847k. 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. Another cause for caution is that is bled CA$2.1m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Ackroo (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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