We Think Aspen Aerogels (NYSE:ASPN) Has A Fair Chunk Of 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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?

Why Does Debt Bring Risk?

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. 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 Aspen Aerogels

What Is Aspen Aerogels's Debt?

As you can see below, at the end of March 2024, Aspen Aerogels had US$118.0m of debt, up from US$106.4m a year ago. Click the image for more detail. On the flip side, it has US$101.5m in cash leading to net debt of about US$16.6m.

How Healthy Is Aspen Aerogels' Balance Sheet?

According to the last reported balance sheet, Aspen Aerogels had liabilities of US$63.6m due within 12 months, and liabilities of US$143.2m due beyond 12 months. Offsetting these obligations, it had cash of US$101.5m as well as receivables valued at US$84.0m due within 12 months. So it has liabilities totalling US$21.3m more than its cash and near-term receivables, combined.

This state of affairs indicates that Aspen Aerogels' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$1.78b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Aspen Aerogels has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Aspen Aerogels 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 Aspen Aerogels wasn't profitable at an EBIT level, but managed to grow its revenue by 53%, to US$288m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Aspen Aerogels's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$22m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$188m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 example Aspen Aerogels has 4 warning signs (and 2 which are potentially serious) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com