We Think AMMO (NASDAQ:POWW) Can Stay On Top Of Its Debt

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 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 should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out 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$2.22m at the end of March 2022, a reduction from US$8.47m over a year. However, it does have US$23.3m in cash offsetting this, leading to net cash of US$21.1m.

A Look At AMMO's Liabilities

According to the last reported balance sheet, AMMO had liabilities of US$35.8m due within 12 months, and liabilities of US$4.05m due beyond 12 months. On the other hand, it had cash of US$23.3m and US$44.0m worth of receivables due within a year. So it can boast US$27.4m more liquid assets than total liabilities.

This short term liquidity is a sign that AMMO could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, AMMO boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, AMMO turned things around in the last 12 months, delivering and EBIT of US$37m. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last year, AMMO burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case AMMO has US$21.1m in net cash and a decent-looking balance sheet. So we are not troubled with AMMO's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with AMMO (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.