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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Aspen Aerogels, Inc. (NYSE:ASPN) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Aspen Aerogels
How Much Debt Does Aspen Aerogels Carry?
The image below, which you can click on for greater detail, shows that at September 2023 Aspen Aerogels had debt of US$112.1m, up from US$105.2m in one year. On the flip side, it has US$94.6m in cash leading to net debt of about US$17.4m.
How Strong Is Aspen Aerogels' Balance Sheet?
The latest balance sheet data shows that Aspen Aerogels had liabilities of US$61.3m due within a year, and liabilities of US$134.1m falling due after that. Offsetting this, it had US$94.6m in cash and US$54.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$46.3m.
Given Aspen Aerogels has a market capitalization of US$841.0m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Aspen Aerogels can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Aspen Aerogels wasn't profitable at an EBIT level, but managed to grow its revenue by 41%, to US$214m. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Despite the top line growth, Aspen Aerogels still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$60m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$270m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Aspen Aerogels has 3 warning signs (and 1 which is concerning) we think you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.