Is Aqua Metals (NASDAQ:AQMS) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Aqua Metals, Inc. (NASDAQ:AQMS) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, 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.

Check out our latest analysis for Aqua Metals

How Much Debt Does Aqua Metals Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Aqua Metals had debt of US$5.89m, up from none in one year. However, it does have US$9.29m in cash offsetting this, leading to net cash of US$3.41m.

How Strong Is Aqua Metals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aqua Metals had liabilities of US$11.2m due within 12 months and liabilities of US$350.0k due beyond that. On the other hand, it had cash of US$9.29m and US$15.9m worth of receivables due within a year. So it actually has US$13.7m more liquid assets than total liabilities.

This surplus suggests that Aqua Metals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Aqua Metals 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 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're focused on the future you can check out this free report showing analyst profit forecasts.

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?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Aqua Metals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$16m of cash and made a loss of US$16m. Given it only has net cash of US$3.41m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 Aqua Metals has 6 warning signs (and 2 which can't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.