Is AMMO (NASDAQ:POWW) Using Debt In A Risky Way?

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.' 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 should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for AMMO

What Is AMMO's Debt?

The image below, which you can click on for greater detail, shows that AMMO had debt of US$12.3m at the end of September 2023, a reduction from US$12.9m over a year. However, it does have US$49.6m in cash offsetting this, leading to net cash of US$37.3m.

How Strong Is AMMO's Balance Sheet?

According to the last reported balance sheet, AMMO had liabilities of US$27.6m due within 12 months, and liabilities of US$12.0m due beyond 12 months. On the other hand, it had cash of US$49.6m and US$23.0m worth of receivables due within a year. So it can boast US$32.9m more liquid assets than total liabilities.

This surplus suggests that AMMO has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that AMMO has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if AMMO 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.

In the last year AMMO had a loss before interest and tax, and actually shrunk its revenue by 38%, to US$145m. 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$29m. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with AMMO , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.