Is Aterian (NASDAQ:ATER) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Aterian, Inc. (NASDAQ:ATER) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Aterian

What Is Aterian's Debt?

You can click the graphic below for the historical numbers, but it shows that Aterian had US$20.4m of debt in March 2023, down from US$33.5m, one year before. However, its balance sheet shows it holds US$33.9m in cash, so it actually has US$13.5m net cash.

How Strong Is Aterian's Balance Sheet?

According to the last reported balance sheet, Aterian had liabilities of US$42.4m due within 12 months, and liabilities of US$1.45m due beyond 12 months. On the other hand, it had cash of US$33.9m and US$3.49m worth of receivables due within a year. So its liabilities total US$6.46m more than the combination of its cash and short-term receivables.

Of course, Aterian has a market capitalization of US$46.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 ultimately the future profitability of the business will decide if Aterian can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Aterian had a loss before interest and tax, and actually shrunk its revenue by 11%, to US$214m. We would much prefer see growth.

So How Risky Is Aterian?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Aterian had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$12m of cash and made a loss of US$179m. Given it only has net cash of US$13.5m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example, we've discovered 3 warning signs for Aterian that you should be aware of before investing here.

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.