Is Akerna (NASDAQ:KERN) Using Debt Sensibly?

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 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. As with many other companies Akerna Corp. (NASDAQ:KERN) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Akerna

How Much Debt Does Akerna Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Akerna had debt of US$15.6m, up from none in one year. But on the other hand it also has US$17.8m in cash, leading to a US$2.24m net cash position.

A Look At Akerna's Liabilities

We can see from the most recent balance sheet that Akerna had liabilities of US$15.7m falling due within a year, and liabilities of US$3.90m due beyond that. On the other hand, it had cash of US$17.8m and US$2.37m worth of receivables due within a year. So it actually has US$571.6k more liquid assets than total liabilities.

Having regard to Akerna's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$101.9m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Akerna 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 ultimately the future profitability of the business will decide if Akerna can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Akerna reported revenue of US$16m, which is a gain of 26%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Akerna?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Akerna had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$21m of cash and made a loss of US$34m. With only US$2.24m on the balance sheet, it would appear that its going to need to raise capital again soon. Akerna's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Akerna is showing 4 warning signs in our investment analysis , and 2 of those make us uncomfortable...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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