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 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. We note that AMMO, Inc. (NASDAQ:POWW) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
What Is AMMO's Debt?
The image below, which you can click on for greater detail, shows that AMMO had debt of US$11.2m at the end of December 2023, a reduction from US$13.4m over a year. But it also has US$54.7m in cash to offset that, meaning it has US$43.4m net cash.
A Look At AMMO's Liabilities
Zooming in on the latest balance sheet data, we can see that AMMO had liabilities of US$26.6m due within 12 months and liabilities of US$12.6m due beyond that. Offsetting this, it had US$54.7m in cash and US$21.1m in receivables that were due within 12 months. So it can boast US$36.6m more liquid assets than total liabilities.
This short term liquidity is a sign that AMMO could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, AMMO boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine AMMO'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.
In the last year AMMO had a loss before interest and tax, and actually shrunk its revenue by 31%, to US$142m. To be frank that doesn't bode well.
So How Risky Is AMMO?
Although AMMO had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$38m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for AMMO 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.