Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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 accesso Technology Group plc (LON:ACSO) makes use of debt. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company’s use of debt, we first look at cash and debt together.
As you can see below, at the end of December 2020, accesso Technology Group had US$26.7m of debt, up from US$15.9m a year ago. Click the image for more detail. But on the other hand it also has US$56.4m in cash, leading to a US$29.7m net cash position.
A Look At accesso Technology Group’s Liabilities
We can see from the most recent balance sheet that accesso Technology Group had liabilities of US$27.4m falling due within a year, and liabilities of US$39.4m due beyond that. Offsetting this, it had US$56.4m in cash and US$19.3m in receivables that were due within 12 months. So it actually has US$8.89m more liquid assets than total liabilities.
This short term liquidity is a sign that accesso Technology Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that accesso Technology Group 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 ultimately the future profitability of the business will decide if accesso Technology Group 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, accesso Technology Group made a loss at the EBIT level, and saw its revenue drop to US$56m, which is a fall of 52%. To be frank that doesn’t bode well.
So How Risky Is accesso Technology Group?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months accesso Technology Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$18m of cash and made a loss of US$30m. Given it only has net cash of US$29.7m, the company may need to raise more capital if it doesn’t reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. 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. To that end, you should be aware of the 2 warning signs we’ve spotted with accesso Technology Group .
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.
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.