Is Ariadne Australia (ASX: ARA) a risky investment?
Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about the risk level of a business, we always like to look at its use of debt because debt overload can lead to bankruptcy. Mostly, Ariadne Australia Limited (ASX: ARA) has debt. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. 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 stock price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest analysis for Ariadne Australia
What is Ariadne Australia’s net debt?
As you can see below, at the end of December 2020, Ariadne Australia was in debt of A $ 18.2 million, up from A $ 4.85 million a year ago. Click on the image for more details. But he also has A $ 31.2 million in cash to make up for that, which means he has A $ 12.9 million in net cash.
How healthy is Ariadne Australia’s balance sheet?
We can see from the most recent balance sheet that Ariadne Australia had liabilities of A $ 8.14 million due within one year and liabilities of A $ 27.4 million beyond. In return for these obligations, he had cash of A $ 31.2 million as well as receivables valued at A $ 1.79 million due within 12 months. As a result, its liabilities total AU $ 2.54 million more than the combination of its cash and short-term receivables.
Given that Ariadne Australia’s listed shares are worth a total of A $ 107.0 million, it seems unlikely that this level of liabilities is a major threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. While she has commitments to note, Ariadne Australia also has more cash than debt, so we’re pretty confident that she can handle her debt safely.
Notably, Ariadne Australia recorded a loss in EBIT last year, but improved this to reach a positive EBIT of AU $ 1.1 million over the past twelve months. The balance sheet is clearly the area to focus on when analyzing debt. But you cannot view the debt in total isolation; because Ariadne Australia will need revenue to service this debt. So when you consider debt, it’s really worth looking at the profit trend. Click here for an interactive snapshot.
But our last consideration is also important, because a business cannot pay its debt with profits on paper; he needs cash. Ariadne Australia may have net cash on the balance sheet, but it’s always interesting to see the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its capacity. to manage debt. Fortunately for all shareholders, Ariadne Australia has actually produced more free cash flow than EBIT over the past year. That kind of big cash conversion turns us on as much as the crowd when the beat drops at a Daft Punk concert.
While it always makes sense to look at the total liabilities of a business, it is very reassuring that Ariadne Australia has AU $ 12.9 million in net cash. And that impressed us with free cash flow of A $ 2.6 million, or 230% of its EBIT. We are therefore not concerned with the use of Ariadne Australia debt. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. Know that Ariadne Australia shows 2 warning signs in our investment analysis , and 1 of these concerns …
Of course, if you are the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash net growth stocks, today.
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