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. We note that ACSL Ltd. (TSE:6232) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.
Check out our latest analysis for ACSL
What Is ACSL's Net Debt?
As you can see below, at the end of September 2024, ACSL had JP¥3.54b of debt, up from JP¥2.18b a year ago. Click the image for more detail. On the flip side, it has JP¥1.16b in cash leading to net debt of about JP¥2.38b.
A Look At ACSL's Liabilities
The latest balance sheet data shows that ACSL had liabilities of JP¥1.80b due within a year, and liabilities of JP¥2.24b falling due after that. Offsetting these obligations, it had cash of JP¥1.16b as well as receivables valued at JP¥794.0m due within 12 months. So it has liabilities totalling JP¥2.08b more than its cash and near-term receivables, combined.
Of course, ACSL has a market capitalization of JP¥12.8b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ACSL'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 ACSL wasn't profitable at an EBIT level, but managed to grow its revenue by 109%, to JP¥2.4b. So there's no doubt that shareholders are cheering for growth
Caveat Emptor
Despite the top line growth, ACSL still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable JP¥2.2b 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 JP¥2.5b 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. We've identified 5 warning signs with ACSL (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.
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. 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.
About TSE:6232
ACSL
Engages in the manufacture and sale of industrial drones in Japan and internationally.
Moderate with imperfect balance sheet.
