Here's Why Ainos (NASDAQ:AIMD) Can Afford Some 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 Ainos, Inc. (NASDAQ:AIMD) 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 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ainos

What Is Ainos's Debt?

You can click the graphic below for the historical numbers, but it shows that Ainos had US$3.56m of debt in March 2023, down from US$31.3m, one year before. However, because it has a cash reserve of US$1.15m, its net debt is less, at about US$2.41m.

How Strong Is Ainos' Balance Sheet?

The latest balance sheet data shows that Ainos had liabilities of US$1.87m due within a year, and liabilities of US$2.50m falling due after that. On the other hand, it had cash of US$1.15m and US$1.61m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.61m.

Given Ainos has a market capitalization of US$14.4m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ainos will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Ainos wasn't profitable at an EBIT level, but managed to grow its revenue by 412%, to US$3.5m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Despite the top line growth, Ainos still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$14m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$3.6m of cash over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Ainos has 6 warning signs (and 4 which make us uncomfortable) 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.