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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Aspermont Limited (ASX:ASP) does use debt in its business. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Aspermont
What Is Aspermont's Debt?
You can click the graphic below for the historical numbers, but it shows that Aspermont had AU$23.0k of debt in March 2019, down from AU$85.0k, one year before. However, its balance sheet shows it holds AU$1.35m in cash, so it actually has AU$1.33m net cash.
How Healthy Is Aspermont's Balance Sheet?
We can see from the most recent balance sheet that Aspermont had liabilities of AU$8.16m falling due within a year, and liabilities of AU$2.36m due beyond that. On the other hand, it had cash of AU$1.35m and AU$1.64m worth of receivables due within a year. So it has liabilities totalling AU$7.53m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Aspermont is worth AU$23.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Aspermont boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Aspermont will need earnings to service that debt. 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.
In the last year Aspermont managed to grow its revenue by 27%, to AU$16m. With any luck the company will be able to grow its way to profitability.