Is Expert.ai (BIT:EXAI) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Expert.ai S.p.A. (BIT:EXAI) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Expert.ai

How Much Debt Does Expert.ai Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Expert.ai had debt of €33.1m, up from €24.5m in one year. But it also has €54.0m in cash to offset that, meaning it has €20.9m net cash.

A Look At Expert.ai's Liabilities

Zooming in on the latest balance sheet data, we can see that Expert.ai had liabilities of €20.2m due within 12 months and liabilities of €33.5m due beyond that. On the other hand, it had cash of €54.0m and €25.7m worth of receivables due within a year. So it can boast €26.0m more liquid assets than total liabilities.

This excess liquidity suggests that Expert.ai is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Expert.ai has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Expert.ai can strengthen its balance sheet over time. 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 Expert.ai had a loss before interest and tax, and actually shrunk its revenue by 7.6%, to €35m. That's not what we would hope to see.

So How Risky Is Expert.ai?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Expert.ai had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €10m of cash and made a loss of €5.4m. But the saving grace is the €20.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Expert.ai has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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