Is Akerna (NASDAQ:KERN) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Akerna Corp. (NASDAQ:KERN) does carry debt. But the real question is whether this debt is making the company risky.

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 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. 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 Akerna

How Much Debt Does Akerna Carry?

The image below, which you can click on for greater detail, shows that Akerna had debt of US$8.36m at the end of June 2021, a reduction from US$16.3m over a year. However, it does have US$11.8m in cash offsetting this, leading to net cash of US$3.42m.

A Look At Akerna's Liabilities

The latest balance sheet data shows that Akerna had liabilities of US$13.0m due within a year, and liabilities of US$1.20m falling due after that. Offsetting these obligations, it had cash of US$11.8m as well as receivables valued at US$1.44m due within 12 months. So it has liabilities totalling US$996.3k more than its cash and near-term receivables, combined.

This state of affairs indicates that Akerna's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$83.0m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Akerna also has more cash than debt, so we're pretty confident 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 Akerna'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.

Over 12 months, Akerna reported revenue of US$18m, which is a gain of 47%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Akerna?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Akerna had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$16m and booked a US$37m accounting loss. With only US$3.42m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Akerna may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Akerna (of which 2 are concerning!) 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.
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