Is AudioEye (NASDAQ:AEYE) Using Debt In A Risky Way?

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. Importantly, AudioEye, Inc. (NASDAQ:AEYE) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for AudioEye

What Is AudioEye's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 AudioEye had debt of US$6.75m, up from none in one year. However, its balance sheet shows it holds US$7.04m in cash, so it actually has US$290.0k net cash.

A Look At AudioEye's Liabilities

The latest balance sheet data shows that AudioEye had liabilities of US$11.4m due within a year, and liabilities of US$7.23m falling due after that. Offsetting this, it had US$7.04m in cash and US$5.08m in receivables that were due within 12 months. So it has liabilities totalling US$6.52m more than its cash and near-term receivables, combined.

Of course, AudioEye has a market capitalization of US$215.2m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, AudioEye also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 AudioEye 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.

Over 12 months, AudioEye reported revenue of US$32m, which is a gain of 2.8%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is AudioEye?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that AudioEye had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$1.8m and booked a US$4.7m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$290.0k. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for AudioEye you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.