Stock Analysis

Here's Why Ackroo (CVE:AKR) Can Afford Some Debt

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TSXV:AKR
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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, Ackroo Inc. (CVE:AKR) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

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What Is Ackroo's Debt?

You can click the graphic below for the historical numbers, but it shows that Ackroo had CA$2.97m of debt in September 2022, down from CA$3.46m, one year before. However, it does have CA$325.1k in cash offsetting this, leading to net debt of about CA$2.65m.

debt-equity-history-analysis
TSXV:AKR Debt to Equity History March 16th 2023

How Healthy Is Ackroo's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ackroo had liabilities of CA$1.72m due within 12 months and liabilities of CA$4.23m due beyond that. Offsetting this, it had CA$325.1k in cash and CA$527.6k in receivables that were due within 12 months. So its liabilities total CA$5.10m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Ackroo is worth CA$9.10m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Ackroo's earnings that will influence how the balance sheet holds up in the future. 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, Ackroo reported revenue of CA$6.3m, which is a gain of 5.0%, 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 Ackroo produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$1.3m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of CA$2.9m into a profit. In the meantime, we consider the stock very 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. For example Ackroo has 5 warning signs (and 3 which make us uncomfortable) we think you should know about.

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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