Is Ackroo (CVE:AKR) A Risky Investment?

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.' 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. As with many other companies Ackroo Inc. (CVE:AKR) makes use of 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt 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. On the flip side, it has CA$325.1k in cash leading to net debt of about 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$1.72m falling due within a year, 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 it has liabilities totalling CA$5.10m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$8.10m, so it does suggest shareholders should keep an eye on Ackroo's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ackroo's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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. Its EBIT loss was a whopping CA$1.3m. 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. For example, we would not want to see a repeat of last year's loss of CA$2.9m. In the meantime, we consider the stock very risky. 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. For instance, we've identified 3 warning signs for Ackroo (2 shouldn't be ignored) you should be aware of.

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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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.