Is Aqua Metals (NASDAQ:AQMS) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Aqua Metals, Inc. (NASDAQ:AQMS) does use debt in its business. But the more important question is: how much risk is that debt creating?

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

View our latest analysis for Aqua Metals

What Is Aqua Metals's Debt?

The image below, which you can click on for greater detail, shows that Aqua Metals had debt of US$2.95m at the end of September 2023, a reduction from US$5.89m over a year. However, it does have US$25.6m in cash offsetting this, leading to net cash of US$22.6m.

A Look At Aqua Metals' Liabilities

We can see from the most recent balance sheet that Aqua Metals had liabilities of US$3.59m falling due within a year, and liabilities of US$2.95m due beyond that. Offsetting this, it had US$25.6m in cash and US$76.0k in receivables that were due within 12 months. So it actually has US$19.1m more liquid assets than total liabilities.

It's good to see that Aqua Metals has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Aqua Metals has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aqua Metals'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.

It seems likely shareholders hope that Aqua Metals can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Aqua Metals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Aqua Metals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$7.8m and booked a US$18m accounting loss. With only US$22.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Aqua Metals is showing 4 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.