These 4 Measures Indicate That AqualisBraemar LOC (OB:AQUA) Is Using Debt Safely

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 AqualisBraemar LOC ASA (OB:AQUA) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for AqualisBraemar LOC

What Is AqualisBraemar LOC's Debt?

As you can see below, at the end of December 2020, AqualisBraemar LOC had US$15.1m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$30.6m in cash, so it actually has US$15.6m net cash.

A Look At AqualisBraemar LOC's Liabilities

The latest balance sheet data shows that AqualisBraemar LOC had liabilities of US$39.9m due within a year, and liabilities of US$13.8m falling due after that. Offsetting these obligations, it had cash of US$30.6m as well as receivables valued at US$54.4m due within 12 months. So it can boast US$31.3m more liquid assets than total liabilities.

This surplus liquidity suggests that AqualisBraemar LOC's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, AqualisBraemar LOC boasts net cash, so it's fair to say it does not have a heavy debt load!

Although AqualisBraemar LOC made a loss at the EBIT level, last year, it was also good to see that it generated US$4.3m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since AqualisBraemar LOC will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. AqualisBraemar LOC may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, AqualisBraemar LOC actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that AqualisBraemar LOC has net cash of US$15.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$8.3m, being 192% of its EBIT. So is AqualisBraemar LOC's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 7 warning signs for AqualisBraemar LOC you should be aware of.

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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