Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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. Importantly, Astrotech Corporation (NASDAQ:ASTC) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Astrotech
What Is Astrotech’s Net Debt?
As you can see below, at the end of June 2020, Astrotech had US$3.04m of debt, up from none a year ago. Click the image for more detail. But it also has US$3.35m in cash to offset that, meaning it has US$307.0k net cash.
How Strong Is Astrotech’s Balance Sheet?
We can see from the most recent balance sheet that Astrotech had liabilities of US$4.35m falling due within a year, and liabilities of US$955.0k due beyond that. On the other hand, it had cash of US$3.35m and US$530.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.4m.
Of course, Astrotech has a market capitalization of US$16.2m, 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. Despite its noteworthy liabilities, Astrotech boasts net cash, so it’s fair to say it does not have a heavy debt load! There’s no doubt that we learn most about debt from the balance sheet. But it is Astrotech’s earnings that will influence how the balance sheet holds up in the future. 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.
It seems likely shareholders hope that Astrotech can significantly advance the business plan before too long, because it doesn’t have any significant revenue at the moment.
So How Risky Is Astrotech?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Astrotech had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$6.9m and booked a US$8.3m accounting loss. With only US$307.0k on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Astrotech has dazzling revenue growth, so there’s a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We’ve spotted 5 warning signs for Astrotech you should be aware of, and 2 of them are significant.
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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