Nasdaq-Listed Companies

Is Advanced Emissions Solutions (NASDAQ:ADES) 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.' 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. As with many other companies Advanced Emissions Solutions, Inc. (NASDAQ:ADES) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

How Much Debt Does Advanced Emissions Solutions Carry?

The image below, which you can click on for greater detail, shows that Advanced Emissions Solutions had debt of US$3.31m at the end of June 2021, a reduction from US$29.7m over a year. But on the other hand it also has US$41.3m in cash, leading to a US$38.0m net cash position.

NasdaqGM:ADES Debt to Equity History October 3rd 2021

How Strong Is Advanced Emissions Solutions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Advanced Emissions Solutions had liabilities of US$27.2m due within 12 months and liabilities of US$15.1m due beyond that. Offsetting these obligations, it had cash of US$41.3m as well as receivables valued at US$15.2m due within 12 months. So it can boast US$14.3m more liquid assets than total liabilities.

This surplus suggests that Advanced Emissions Solutions has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Advanced Emissions Solutions 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 it is Advanced Emissions Solutions'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.

In the last year Advanced Emissions Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to US$79m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Advanced Emissions Solutions?

Although Advanced Emissions Solutions had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$36m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 33% is a good sign. We'd see further strong growth as an optimistic indication. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Advanced Emissions Solutions has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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