Stock Analysis

Is a.k.a. Brands Holding (NYSE:AKA) A Risky Investment?

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NYSE:AKA

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 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. As with many other companies a.k.a. Brands Holding Corp. (NYSE:AKA) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for a.k.a. Brands Holding

What Is a.k.a. Brands Holding's Net Debt?

The image below, which you can click on for greater detail, shows that a.k.a. Brands Holding had debt of US$103.6m at the end of March 2024, a reduction from US$132.4m over a year. However, it also had US$21.9m in cash, and so its net debt is US$81.6m.

NYSE:AKA Debt to Equity History August 1st 2024

How Healthy Is a.k.a. Brands Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that a.k.a. Brands Holding had liabilities of US$82.5m due within 12 months and liabilities of US$137.8m due beyond that. Offsetting this, it had US$21.9m in cash and US$4.08m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$194.2m.

When you consider that this deficiency exceeds the company's US$180.2m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if a.k.a. Brands Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, a.k.a. Brands Holding made a loss at the EBIT level, and saw its revenue drop to US$543m, which is a fall of 7.1%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months a.k.a. Brands Holding produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$14m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of US$98m. In the meantime, we consider the stock to be 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, we've discovered 2 warning signs for a.k.a. Brands Holding (1 is a bit concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.