Is AMMO (NASDAQ:POWW) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that AMMO, Inc. (NASDAQ:POWW) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for AMMO

What Is AMMO's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 AMMO had US$13.4m of debt, an increase on US$5.63m, over one year. However, it does have US$27.1m in cash offsetting this, leading to net cash of US$13.7m.

A Look At AMMO's Liabilities

We can see from the most recent balance sheet that AMMO had liabilities of US$28.2m falling due within a year, and liabilities of US$14.9m due beyond that. Offsetting this, it had US$27.1m in cash and US$30.4m in receivables that were due within 12 months. So it actually has US$14.4m 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.

Shareholders should be aware that AMMO's EBIT was down 92% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While AMMO has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, AMMO saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case AMMO has US$13.7m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about AMMO's balance sheet. 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. For example, we've discovered 1 warning sign for AMMO that you should be aware of before investing here.

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.