AMMO (NASDAQ:POWW) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that AMMO, Inc. (NASDAQ:POWW) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for AMMO

How Much Debt Does AMMO Carry?

The image below, which you can click on for greater detail, shows that AMMO had debt of US$11.0m at the end of March 2024, a reduction from US$13.5m over a year. However, it does have US$55.6m in cash offsetting this, leading to net cash of US$44.6m.

A Look At AMMO's Liabilities

The latest balance sheet data shows that AMMO had liabilities of US$30.9m due within a year, and liabilities of US$12.4m falling due after that. Offsetting these obligations, it had cash of US$55.6m as well as receivables valued at US$28.2m due within 12 months. So it actually has US$40.5m more liquid assets than total liabilities.

It's good to see that AMMO has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that AMMO has more cash than debt is arguably a good indication that it can manage its debt safely. 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 AMMO'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 AMMO had a loss before interest and tax, and actually shrunk its revenue by 24%, to US$139m. To be frank that doesn't bode well.

So How Risky Is AMMO?

While AMMO lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$25m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. For instance, we've identified 2 warning signs for AMMO that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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