Is AudioEye (NASDAQ:AEYE) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for AudioEye

What Is AudioEye's Net Debt?

As you can see below, at the end of June 2024, AudioEye had US$6.77m of debt, up from none a year ago. Click the image for more detail. However, because it has a cash reserve of US$5.09m, its net debt is less, at about US$1.69m.

How Healthy Is AudioEye's Balance Sheet?

We can see from the most recent balance sheet that AudioEye had liabilities of US$9.95m falling due within a year, and liabilities of US$7.20m due beyond that. Offsetting these obligations, it had cash of US$5.09m as well as receivables valued at US$5.42m due within 12 months. So its liabilities total US$6.64m more than the combination of its cash and short-term receivables.

Given AudioEye has a market capitalization of US$300.5m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, AudioEye has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine AudioEye'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.

Over 12 months, AudioEye reported revenue of US$32m, which is a gain of 3.9%, 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.

Caveat Emptor

Importantly, AudioEye had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$2.4m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$1.0m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for AudioEye (of which 1 is a bit concerning!) you should know about.

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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