Is Agora (NASDAQ:API) 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.' 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. As with many other companies Agora, Inc. (NASDAQ:API) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Agora

What Is Agora's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Agora had US$11.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$216.7m in cash, so it actually has US$205.6m net cash.

A Look At Agora's Liabilities

The latest balance sheet data shows that Agora had liabilities of US$56.9m due within a year, and liabilities of US$13.0m falling due after that. Offsetting this, it had US$216.7m in cash and US$40.3m in receivables that were due within 12 months. So it actually has US$187.1m more liquid assets than total liabilities.

This surplus liquidity suggests that Agora's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Agora has more cash than debt is arguably a good indication that 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 Agora 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.

In the last year Agora had a loss before interest and tax, and actually shrunk its revenue by 12%, to US$142m. We would much prefer see growth.

So How Risky Is Agora?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Agora lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$30m of cash and made a loss of US$87m. But the saving grace is the US$205.6m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the 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. Case in point: We've spotted 1 warning sign for Agora you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.