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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Akoustis Technologies, Inc. (NASDAQ:AKTS) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Akoustis Technologies's Net Debt?
As you can see below, at the end of June 2022, Akoustis Technologies had US$43.7m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$80.5m in cash, so it actually has US$36.8m net cash.
How Strong Is Akoustis Technologies' Balance Sheet?
The latest balance sheet data shows that Akoustis Technologies had liabilities of US$12.7m due within a year, and liabilities of US$45.3m falling due after that. On the other hand, it had cash of US$80.5m and US$4.72m worth of receivables due within a year. So it actually has US$27.3m more liquid assets than total liabilities.
This surplus suggests that Akoustis Technologies is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Akoustis Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Akoustis Technologies 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.
Over 12 months, Akoustis Technologies reported revenue of US$15m, which is a gain of 132%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is Akoustis Technologies?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Akoustis Technologies had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$73m and booked a US$59m accounting loss. But at least it has US$36.8m on the balance sheet to spend on growth, near-term. Importantly, Akoustis Technologies's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Akoustis Technologies (including 1 which is potentially serious) .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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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