Is a.k.a. Brands Holding (NYSE:AKA) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies a.k.a. Brands Holding Corp. (NYSE:AKA) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for a.k.a. Brands Holding

How Much Debt Does a.k.a. Brands Holding Carry?

As you can see below, a.k.a. Brands Holding had US$93.4m of debt at December 2023, down from US$143.6m a year prior. However, because it has a cash reserve of US$21.9m, its net debt is less, at about US$71.5m.

A Look At a.k.a. Brands Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that a.k.a. Brands Holding had liabilities of US$86.0m due within 12 months and liabilities of US$127.1m due beyond that. Offsetting these obligations, it had cash of US$21.9m as well as receivables valued at US$4.80m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$186.4m.

The deficiency here weighs heavily on the US$103.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, a.k.a. Brands Holding would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine a.k.a. Brands Holding's ability to maintain a healthy balance sheet going forward. 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 a.k.a. Brands Holding had a loss before interest and tax, and actually shrunk its revenue by 11%, to US$546m. That's not what we would hope to see.

Caveat Emptor

While a.k.a. Brands Holding's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$15m 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$99m. And until that time we think this is a 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 instance, we've identified 2 warning signs for a.k.a. Brands Holding that you should be aware of.

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.