Alphawave IP Group (LON:AWE) Is Making Moderate Use Of 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.' 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 Alphawave IP Group plc (LON:AWE) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Alphawave IP Group

How Much Debt Does Alphawave IP Group Carry?

As you can see below, Alphawave IP Group had US$217.9m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$76.3m in cash leading to net debt of about US$141.6m.

How Strong Is Alphawave IP Group's Balance Sheet?

According to the last reported balance sheet, Alphawave IP Group had liabilities of US$384.8m due within 12 months, and liabilities of US$49.1m due beyond 12 months. Offsetting this, it had US$76.3m in cash and US$139.2m in receivables that were due within 12 months. So it has liabilities totalling US$218.3m more than its cash and near-term receivables, combined.

Of course, Alphawave IP Group has a market capitalization of US$1.13b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Alphawave IP Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Alphawave IP Group had a loss before interest and tax, and actually shrunk its revenue by 29%, to US$226m. That makes us nervous, to say the least.

Caveat Emptor

While Alphawave IP Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$56m 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 US$82m 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Alphawave IP Group 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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