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Health Check: How Prudently Does Advanced Human Imaging (ASX:AHI) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Advanced Human Imaging Limited (ASX:AHI) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Advanced Human Imaging

What Is Advanced Human Imaging's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Advanced Human Imaging had AU$2.02m of debt, an increase on AU$1.46m, over one year. But it also has AU$4.76m in cash to offset that, meaning it has AU$2.73m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Advanced Human Imaging's Liabilities

The latest balance sheet data shows that Advanced Human Imaging had liabilities of AU$2.90m due within a year, and liabilities of AU$97.8k falling due after that. On the other hand, it had cash of AU$4.76m and AU$87.8k worth of receivables due within a year. So it can boast AU$1.85m more liquid assets than total liabilities.

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Having regard to Advanced Human Imaging's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$212.7m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Advanced Human Imaging 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 you can't view debt in total isolation; since Advanced Human Imaging will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Advanced Human Imaging reported revenue of AU$724k, which is a gain of 389%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Advanced Human Imaging?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Advanced Human Imaging had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$2.2m and booked a AU$7.9m accounting loss. Given it only has net cash of AU$2.73m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Advanced Human Imaging'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. However, not all investment risk resides within the balance sheet - far from it. For example Advanced Human Imaging has 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

This article by Simply Wall St is general in nature. 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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