Is Aurum PropTech (NSE:AURUM) A Risky Investment?

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. Importantly, Aurum PropTech Limited (NSE:AURUM) does carry debt. But the more important question is: how much risk is that debt creating?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Aurum PropTech

What Is Aurum PropTech's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Aurum PropTech had debt of ₹954.7m, up from ₹11.8m in one year. However, because it has a cash reserve of ₹422.6m, its net debt is less, at about ₹532.1m.

How Strong Is Aurum PropTech's Balance Sheet?

We can see from the most recent balance sheet that Aurum PropTech had liabilities of ₹2.08b falling due within a year, and liabilities of ₹1.43b due beyond that. Offsetting this, it had ₹422.6m in cash and ₹221.5m in receivables that were due within 12 months. So it has liabilities totalling ₹2.87b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Aurum PropTech is worth ₹9.45b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Aurum PropTech'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.

In the last year Aurum PropTech wasn't profitable at an EBIT level, but managed to grow its revenue by 208%, to ₹1.8b. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Despite the top line growth, Aurum PropTech still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹709m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹741m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Aurum PropTech (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.