Ainsworth Game Technology (ASX: AGI) has debt but no profit; Should we be worried?
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Like many other companies Ainsworth Game Technology Limited (ASX: AGI) uses debt. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for Ainsworth Game Technology
What is Ainsworth Game Technology’s net debt?
As you can see below, Ainsworth Game Technology was in debt of A $ 37.2 million in June 2021, up from A $ 43.9 million the year before. However, he has A $ 42.4 million in cash offsetting this, leading to net cash of A $ 5.15 million.
How strong is Ainsworth Game Technology’s balance sheet?
According to the latest published balance sheet, Ainsworth Game Technology had liabilities of AU $ 46.7 million due within 12 months and liabilities of AU $ 58.5 million due beyond 12 months. In return, he had A $ 42.4 million in cash and A $ 84.3 million in receivables due within 12 months. So he actually has AU $ 21.4 million Following liquid assets as total liabilities.
This surplus suggests that Ainsworth Game Technology has a prudent balance sheet and could likely eliminate its debt without too much difficulty. In short, Ainsworth Game Technology has clean cash flow, so it’s fair to say it doesn’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Ainsworth Game Technology can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Over the past year, Ainsworth Game Technology has not been profitable on EBIT level, but has managed to increase its revenue by 6.8%, to AU $ 160 million. We generally like to see unprofitable businesses growing faster, but each in their own way.
So how risky is Ainsworth gaming technology?
Although Ainsworth Game Technology recorded a loss of earnings before interest and taxes (EBIT) over the past twelve months, it generated positive free cash flow of AU $ 18 million. Thus, although it is in deficit, it does not appear to present too much short-term balance sheet risk, given the net cash position. We will feel more comfortable with the stock once EBIT is positive, given the weak revenue growth. For riskier companies like Ainsworth Game Technology, I always like to keep an eye on long-term profit and income trends. Fortunately, you can click to view our interactive graph of its operating profit, revenue and cash flow.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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