David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Aterian, Inc. (NASDAQ:ATER) does carry debt. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Aterian's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2021 Aterian had US$34.3m of debt, an increase on US$26.3m, over one year. However, it does have US$37.5m in cash offsetting this, leading to net cash of US$3.19m.
How Healthy Is Aterian's Balance Sheet?
We can see from the most recent balance sheet that Aterian had liabilities of US$66.5m falling due within a year, and liabilities of US$42.5m due beyond that. On the other hand, it had cash of US$37.5m and US$9.29m worth of receivables due within a year. So its liabilities total US$62.3m more than the combination of its cash and short-term receivables.
Aterian has a market capitalization of US$262.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Aterian 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 it is future earnings, more than anything, that will determine Aterian's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Aterian reported revenue of US$226m, which is a gain of 33%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Aterian?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Aterian had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$42m and booked a US$274m accounting loss. Given it only has net cash of US$3.19m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Aterian may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Aterian (1 can't be ignored) you should be aware of.
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. 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.
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