Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Akerna Corp. (NASDAQ:KERN) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Akerna's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Akerna had US$15.6m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$17.8m in cash, so it actually has US$2.24m net cash.
How Healthy Is Akerna's Balance Sheet?
According to the last reported balance sheet, Akerna had liabilities of US$15.7m due within 12 months, and liabilities of US$3.90m due beyond 12 months. On the other hand, it had cash of US$17.8m and US$2.37m worth of receivables due within a year. So it can boast US$571.6k more liquid assets than total liabilities.
Having regard to Akerna's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$86.8m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Akerna 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 it is future earnings, more than anything, that will determine Akerna's ability to maintain a healthy balance sheet going forward. 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 Akerna wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to US$16m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Akerna?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Akerna had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$21m of cash and made a loss of US$34m. With only US$2.24m on the balance sheet, it would appear that its going to need to raise capital again soon. Akerna'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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Akerna (of which 2 shouldn't be ignored!) you should know about.
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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