The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, AD1 Holdings Limited (ASX:AD1) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for AD1 Holdings

What Is AD1 Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 AD1 Holdings had debt of AU$3.83m, up from none in one year. But it also has AU$4.62m in cash to offset that, meaning it has AU$783.2k net cash.

How Healthy Is AD1 Holdings' Balance Sheet?

We can see from the most recent balance sheet that AD1 Holdings had liabilities of AU$4.84m falling due within a year, and liabilities of AU$3.63m due beyond that. Offsetting these obligations, it had cash of AU$4.62m as well as receivables valued at AU$1.97m due within 12 months. So it has liabilities totalling AU$1.88m more than its cash and near-term receivables, combined.

Since publicly traded AD1 Holdings shares are worth a total of AU$13.5m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, AD1 Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is AD1 Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.