David Eben put it well: “Volatility is not a risk we care about.” Our focus is to avoid permanent loss of capital. ” When we think about a company’s risk, we always look at how it uses debt. Because too much debt can lead to ruin. Like many other companies, Aterian, Inc. (NASDAQ:ATER) uses debt. But should shareholders be worried about its use of debt?
What risks does debt pose?
Generally, debt only becomes a real problem when a company cannot easily pay off the debt, either by raising capital or with its own cash flow. Part of capitalism is the process of “creative destruction” in which failing companies are ruthlessly liquidated by bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, resulting in permanent shareholder dilution. The advantage of debt, of course, is that it is often cheap capital, especially when it replaces dilution in a company that can be reinvested at a high rate of return. When investigating debt levels, we first consider both cash and debt levels together.
Check out our latest analysis for Aterian
How much debt does Atelian have?
As you can see below, Aterian’s debt was US$10.3m as of June 2024, down from US$17.0m in the year-ago period. However, it also had US$20.3m in cash offsetting this, meaning it had net cash of US$10.1m.
NasdaqCM:ATER Debt to Equity Transition October 15, 2024
Overview of Aterian’s debt
The latest balance sheet data shows that Aterian had liabilities of US$28.7m falling due within a year, and liabilities of US$277,000 falling due after that. On the other hand, the company had cash of US$20.3m and receivables worth US$3.76m that were due within a year. So its liabilities outweigh the sum of its cash and (short-term) receivables by US$4.87m.
Aterian has a market capitalization of US$20.5m, so it’s very likely that it will raise cash to improve its balance sheet if the need arises. However, it’s still worth carefully considering the company’s ability to repay its debt. Despite its notable debt, Aterian boasts net cash, so it’s safe to say it doesn’t have a lot of debt. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, Aterian’s ability to strengthen its balance sheet over the long term will depend on the future profitability of its business. So if you’re focused on the future you should check out this free report showing analyst profit forecasts.
Last year, Aterian made a loss before interest and tax, with actual revenue down 37% to US$121 million. It makes us nervous, to say the least.
So just how dangerous are Atelians?
Essentially, companies that are losing money are riskier than companies that have been profitable for a long time. We also note that Aterian made an earnings before interest and tax (EBIT) loss last year. In fact, it burned through US$1.7m in cash during that time, resulting in a loss of US$23m. But the saving grace is the US$10.1m on the balance sheet. This kitty means the company can continue spending on growth for at least two years at current rates. In summary, we’re a bit skeptical of this, as it looks pretty risky when there’s no free cash flow. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, any company can contain risks that exist outside the balance sheet. For example, we’ve discovered 5 warning signs for Aterian that you should be aware of before investing here.
If you’re interested in investing in businesses that can grow profits without taking on debt, check out this free list of growing businesses that have net cash on their balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
