Aspen Aerogels (NYSE:ASPN) Is Making Moderate Use Of Debt

Warren Buffett famously said, '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 can see that Aspen Aerogels, Inc. (NYSE:ASPN) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. 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 Aspen Aerogels

How Much Debt Does Aspen Aerogels Carry?

As you can see below, at the end of September 2023, Aspen Aerogels had US$112.1m of debt, up from US$105.2m a year ago. Click the image for more detail. On the flip side, it has US$94.6m in cash leading to net debt of about US$17.4m.

How Strong Is Aspen Aerogels' Balance Sheet?

We can see from the most recent balance sheet that Aspen Aerogels had liabilities of US$61.3m falling due within a year, and liabilities of US$134.1m due beyond that. Offsetting this, it had US$94.6m in cash and US$54.4m in receivables that were due within 12 months. So it has liabilities totalling US$46.3m more than its cash and near-term receivables, combined.

Given Aspen Aerogels has a market capitalization of US$541.3m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aspen Aerogels'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 Aspen Aerogels wasn't profitable at an EBIT level, but managed to grow its revenue by 41%, to US$214m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Aspen Aerogels still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$60m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$238m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 3 warning signs for Aspen Aerogels (2 can't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.