Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 Aspen Aerogels's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Aspen Aerogels had US$115.0m of debt, an increase on US$103.6m, over one year. But on the other hand it also has US$139.7m in cash, leading to a US$24.7m net cash position.

How Strong Is Aspen Aerogels' Balance Sheet?

According to the last reported balance sheet, Aspen Aerogels had liabilities of US$78.1m due within 12 months, and liabilities of US$136.9m due beyond 12 months. Offsetting these obligations, it had cash of US$139.7m as well as receivables valued at US$72.2m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Aspen Aerogels' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$1.31b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Aspen Aerogels also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Aspen Aerogels's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Aspen Aerogels wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to US$239m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Aspen Aerogels?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Aspen Aerogels lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$218m of cash and made a loss of US$46m. With only US$24.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Aspen Aerogels's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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 we think 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.

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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.