Would AoFrio (NZSE:AOF) Be Better Off With Less Debt?

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.' 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 can see that AoFrio Limited (NZSE:AOF) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

What Is AoFrio's Debt?

As you can see below, at the end of June 2025, AoFrio had NZ$9.23m of debt, up from NZ$4.46m a year ago. Click the image for more detail. However, it does have NZ$1.97m in cash offsetting this, leading to net debt of about NZ$7.26m.

How Strong Is AoFrio's Balance Sheet?

The latest balance sheet data shows that AoFrio had liabilities of NZ$35.9m due within a year, and liabilities of NZ$18.7m falling due after that. Offsetting these obligations, it had cash of NZ$1.97m as well as receivables valued at NZ$22.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NZ$30.4m.

This deficit is considerable relative to its market capitalization of NZ$38.2m, so it does suggest shareholders should keep an eye on AoFrio's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since AoFrio 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.

Check out our latest analysis for AoFrio

Over 12 months, AoFrio reported revenue of NZ$84m, which is a gain of 13%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, AoFrio had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NZ$1.3m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NZ$4.4m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for AoFrio (3 shouldn't be ignored!) that you should be aware of before investing here.

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.