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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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Aurora Spine Corporation (CVE:ASG) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Aurora Spine Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2021 Aurora Spine had US$2.26m of debt, an increase on US$2.14m, over one year. However, it does have US$3.67m in cash offsetting this, leading to net cash of US$1.41m.
How Healthy Is Aurora Spine's Balance Sheet?
We can see from the most recent balance sheet that Aurora Spine had liabilities of US$1.93m falling due within a year, and liabilities of US$2.32m due beyond that. On the other hand, it had cash of US$3.67m and US$2.67m worth of receivables due within a year. So it can boast US$2.09m more liquid assets than total liabilities.
This short term liquidity is a sign that Aurora Spine could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Aurora Spine 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 you can't view debt in total isolation; since Aurora Spine 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 Aurora Spine wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to US$10m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Aurora Spine?
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 Aurora Spine had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$2.8m and booked a US$1.5m accounting loss. However, it has net cash of US$1.41m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Aurora Spine (1 makes us a bit uncomfortable) you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.