Here's Why Ainos (NASDAQ:AIMD) Can Afford Some Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Ainos, Inc. (NASDAQ:AIMD) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Net Debt?

As you can see below, Ainos had US$3.18m of debt at June 2023, down from US$31.8m a year prior. On the flip side, it has US$1.36m in cash leading to net debt of about US$1.82m.

How Strong Is Ainos' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ainos had liabilities of US$1.11m due within 12 months and liabilities of US$2.54m due beyond that. Offsetting this, it had US$1.36m in cash and US$9.4k in receivables that were due within 12 months. So its liabilities total US$2.28m more than the combination of its cash and short-term receivables.

Since publicly traded Ainos shares are worth a total of US$12.5m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ainos will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Ainos wasn't profitable at an EBIT level, but managed to grow its revenue by 158%, to US$2.9m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

While we can certainly appreciate Ainos's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping US$15m. 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$4.3m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 6 warning signs for Ainos (3 make us uncomfortable) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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