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Warren Buffett famously said, '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. We can see that Advanced Human Imaging Limited (ASX:AHI) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Advanced Human Imaging Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2021 Advanced Human Imaging had AU$2.26m of debt, an increase on AU$2.02m, over one year. However, it does have AU$12.3m in cash offsetting this, leading to net cash of AU$10.0m.
How Healthy Is Advanced Human Imaging's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Advanced Human Imaging had liabilities of AU$3.61m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of AU$12.3m as well as receivables valued at AU$1.05m due within 12 months. So it actually has AU$9.72m more liquid assets than total liabilities.
It's good to see that Advanced Human Imaging has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Advanced Human Imaging has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Advanced Human Imaging 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.
Given it has no significant operating revenue at the moment, shareholders will be hoping Advanced Human Imaging can make progress and gain better traction for the business, before it runs low on cash.
So How Risky Is Advanced Human Imaging?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Advanced Human Imaging had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$6.5m of cash and made a loss of AU$23m. Given it only has net cash of AU$10.0m, the company may need to raise more capital if it doesn't reach break-even soon. 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 Advanced Human Imaging (1 makes us a bit uncomfortable) you should be aware of.
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.
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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.