Is Aega (OB:AEGA) Using Debt In A Risky Way?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Aega ASA (OB:AEGA) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Aega

What Is Aega's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Aega had debt of €2.97m, up from none in one year. But on the other hand it also has €4.92m in cash, leading to a €1.95m net cash position.

How Strong Is Aega's Balance Sheet?

According to the last reported balance sheet, Aega had liabilities of €1.14m due within 12 months, and liabilities of €2.72m due beyond 12 months. Offsetting these obligations, it had cash of €4.92m as well as receivables valued at €1.30m due within 12 months. So it can boast €2.36m more liquid assets than total liabilities.

This short term liquidity is a sign that Aega could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Aega boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Aega will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Aega made a loss at the EBIT level, and saw its revenue drop to €657k, which is a fall of 80%. To be frank that doesn't bode well.

So How Risky Is Aega?

While Aega lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of €74k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Be aware that Aega is showing 4 warning signs in our investment analysis , and 1 of those is significant...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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