Warren Buffett famously said, “Volatility isn’t the same as risk.’ It’s only natural to think about a company’s balance sheet when you look at the risk it poses because debt is typically an issue when a business fails. It is important to note that AYO Technology Solutions Limited (JSE: AYO) has debt. However, the question is whether the debt makes the company riskier.
When is Debt Risky?
In general, debt becomes a problem if a company cannot repay it through capital raising or its cash flow. If the business cannot meet its legal obligations to repay its debts, investors could be left without a penny. Although this isn’t too frequent, we witness indebted businesses constantly reducing shareholder value due to lenders forcing them to fund capital with a shaky cost. By replacing dilution, debt is an excellent option for companies that require funds to support growth with high returns. The first step in considering the amount of debt a company has is to look at the debt and cash together.
What is the AYO Technology Solutions Debt?
The image below that you can view in more detail shows that as of February 2022, AYO Technology Solutions had a debt of R56.6m, which is an increase from R15.0m within a single year. It also has R1.75b in cash to offset that, which is R1.70b in cash net.
A Closer Look at AYO Technology Solutions’ Liabilities
The most recent balance sheet data illustrate that AYO Technology Solutions had liabilities of R598.6m due within one year and a weakness of R131.8m becoming due after the year’s end. However, it had cash worth R1.75b and R905.3m of receivables due within the year. It can also boast R1.93b higher in liquid assets than its total liabilities.
This is a strong indication that AYO Technology Solutions likely has a solid financial position (and the debt is not a problem). Based on this, it is possible to conclude that the balance sheet indicates that the business can handle difficulties. In a nutshell, AYO Technology Solutions boasts net cash, which means it’s safe to say that it doesn’t have any debt burden! Its balance sheet is the most crucial aspect to consider when looking at the debt. But it isn’t possible to view the debt on its own because AYO Technology Solutions will need income to pay for the debt. When considering debt, it’s certainly worth looking at the earnings trend. Click here to see an interactive picture.
AYO Technology Solutions had a loss before tax and interest in the past year, which reduced its revenues by 32% to R1.6b. This doesn’t look good.
So, how risky is AYO Technology Solutions?
In their nature, businesses that have lost cash are more high-risk than companies with a long track record of financial success. In the year that was just ended, AYO Technology Solutions had earnings before tax and interest (EBIT) loss, if the truth is stated. Over the same period, it had negative cash flow outflows of R356m and recorded an R272m account loss. Since it has only net cash of R1.70b, it could require more capital if it fails to reach break-even shortly. Even though the balance sheet is liquid, we are slightly nervous when an organization doesn’t generate an annual flow of cash that is free. When analyzing debt levels, the balance sheet is where you should begin. However, each company has risks that are not contained in the balance sheet. We’ve identified four warning signs that you must know about AYO Technologies Solutions (2 are essential).