The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Augmedix, Inc. (NASDAQ:AUGX) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Augmedix's Net Debt?
As you can see below, Augmedix had US$20.5m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has US$37.3m in cash to offset that, meaning it has US$16.8m net cash.
How Healthy Is Augmedix's Balance Sheet?
We can see from the most recent balance sheet that Augmedix had liabilities of US$24.5m falling due within a year, and liabilities of US$17.3m due beyond that. Offsetting this, it had US$37.3m in cash and US$9.98m in receivables that were due within 12 months. So it can boast US$5.50m more liquid assets than total liabilities.
This short term liquidity is a sign that Augmedix could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Augmedix has more cash than debt is arguably a good indication that 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 Augmedix'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.
Over 12 months, Augmedix reported revenue of US$49m, which is a gain of 45%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Augmedix?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Augmedix had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$21m and booked a US$20m accounting loss. But at least it has US$16.8m on the balance sheet to spend on growth, near-term. Augmedix's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Augmedix (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com