Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies American Battery Technology Company (NASDAQ:ABAT) makes use of debt. But the more important question is: how much risk is that debt creating?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for American Battery Technology
As you can see below, American Battery Technology had US$10.2m of debt at December 2024, down from US$16.3m a year prior. But on the other hand it also has US$15.6m in cash, leading to a US$5.46m net cash position.
We can see from the most recent balance sheet that American Battery Technology had liabilities of US$17.4m falling due within a year, and liabilities of US$250.4k due beyond that. On the other hand, it had cash of US$15.6m and US$351.1k worth of receivables due within a year. So it has liabilities totalling US$1.72m more than its cash and near-term receivables, combined.
Having regard to American Battery Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$116.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, American Battery Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is American Battery Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year American Battery Technology managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.
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 American Battery Technology 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$26m and booked a US$59m accounting loss. With only US$5.46m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. We've identified 5 warning signs with American Battery Technology , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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