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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.' 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 note that ÅAC Microtec AB (publ) (STO:AAC) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 ÅAC Microtec
What Is ÅAC Microtec's Net Debt?
As you can see below, ÅAC Microtec had kr763.0k of debt at June 2019, down from kr1.54m a year prior. But it also has kr73.7m in cash to offset that, meaning it has kr72.9m net cash.
A Look At ÅAC Microtec's Liabilities
According to the last reported balance sheet, ÅAC Microtec had liabilities of kr45.2m due within 12 months, and liabilities of kr17.5m due beyond 12 months. Offsetting this, it had kr73.7m in cash and kr30.9m in receivables that were due within 12 months. So it can boast kr41.9m more liquid assets than total liabilities.
This surplus suggests that ÅAC Microtec has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ÅAC Microtec 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 ultimately the future profitability of the business will decide if ÅAC Microtec can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year ÅAC Microtec managed to grow its revenue by 59%, to kr73m. With any luck the company will be able to grow its way to profitability.
So How Risky Is ÅAC Microtec?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year ÅAC Microtec had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through kr32m of cash and made a loss of kr39m. However, it has net cash of kr74m, so it has a bit of time before it will need more capital. ÅAC Microtec's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like ÅAC Microtec I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.