Warren Buffett said: “Volatility is far from synonymous with risk. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that Astrotech Company (NASDAQ:ASTC) has a debt on its balance sheet. But should shareholders worry about its use of debt?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.
What is Astrotech’s debt?
You can click on the graph below for historical numbers, but it shows that in March 2020, Astrotech had $2.50 million in debt, an increase of none, year over year. However, his balance sheet shows that he holds $4.66 million in cash, so he actually has $2.16 million in net cash.
How healthy is Astrotech’s balance sheet?
The latest balance sheet data shows Astrotech had liabilities of $4.15 million due within the year, and liabilities of $711,000 due thereafter. In return, it had $4.66 million in cash and $514.0 k in receivables due within 12 months. She can therefore boast of having 317,000 USD more liquid assets than total Passives.
Considering Astrotech’s size, it appears its cash is well balanced with its total liabilities. So while it’s hard to imagine the $21.4 million company struggling for cash, we still think it’s worth keeping an eye on its balance sheet. Simply put, the fact that Astrotech has more cash than debt is arguably a good indication that it can safely manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it’s Astrotech’s earnings that will influence the balance sheet going forward. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
It seems likely that shareholders will be hoping Astrotech can meaningfully advance the business plan before too long, as it doesn’t have significant revenue at the moment.
So how risky is Astrotech?
Statistically speaking, businesses that lose money are riskier than those that make money. And over the past year, Astrotech has posted a negative earnings before interest and tax (EBIT), truth be told. Indeed, during this period, it burned $6.9 million in cash and suffered a loss of $8.0 million. Given that it only has net cash of US$2.16 million, the company may need to raise more capital if it does not break even soon. It’s important to note that Astrotech’s revenue growth is hot. While unprofitable businesses can be risky, they can also grow strongly and quickly in those pre-profit years. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that Astrotech watch 4 warning signs in our investment analysis and 2 of them cannot be ignored…
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
This Simply Wall St article is general in nature. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.