Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Aterian, Inc. (NASDAQ:ATER) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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.
What Is Aterian's Debt?
The image below, which you can click on for greater detail, shows that at September 2021 Aterian had debt of US$34.3m, up from US$26.3m in one year. But it also has US$37.5m in cash to offset that, meaning it has US$3.19m net cash.
How Strong Is Aterian's Balance Sheet?
The latest balance sheet data shows that Aterian had liabilities of US$66.5m due within a year, and liabilities of US$42.5m falling due after that. On the other hand, it had cash of US$37.5m and US$9.29m worth of receivables due within a year. So its liabilities total US$62.3m more than the combination of its cash and short-term receivables.
Aterian has a market capitalization of US$175.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Aterian 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 future earnings, more than anything, that will determine Aterian'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.
In the last year Aterian wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to US$226m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Aterian?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Aterian 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$42m and booked a US$274m accounting loss. With only US$3.19m 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, Aterian 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. Case in point: We've spotted 5 warning signs for Aterian you should be aware of, and 1 of them is a bit concerning.
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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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.