Does AYO Technology Solutions (JSE:AYO) have a healthy balance sheet?
Warren Buffett said: “Volatility is far from synonymous with risk. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, AYO Technology Solutions Limited (JSE:AYO) is in debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies 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.
Check out our latest analysis for AYO Technology Solutions
What is AYO Technology Solutions’ debt?
The image below, which you can click on for more details, shows that in February 2022, AYO Technology Solutions had a debt of R56.6 million, compared to R15.0 million in one year. But he also has R1.75 billion in cash to offset this, meaning he has a net cash position of R1.70 billion.
A look at the responsibilities of AYO Technology Solutions
The latest balance sheet data shows that AYO Technology Solutions had liabilities of R598.6 million due within one year, and liabilities of R131.8 million falling due thereafter. On the other hand, it had cash of R1.75 billion and R905.3 million of receivables due within one year. So it can boast R1.93b more liquid assets than total Passives.
This surplus strongly suggests that AYO Technology Solutions has a rock-solid balance sheet (and debt is nothing to worry about). With that in mind, one could argue that its track record means the company is capable of dealing with some adversity. In short, AYO Technology Solutions has a net cash position, so it’s fair to say that they don’t have a lot of debt! The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; because AYO Technology Solutions will need income to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Over the past year, AYO Technology Solutions posted a loss before interest and tax and actually reduced its revenue by 32% to R1.6 billion. To be honest, that doesn’t bode well.
So how risky are AYO’s tech solutions?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And over the past year, AYO Technology Solutions has had a loss in earnings before interest and taxes (EBIT), if truth be told. And in the same period, it recorded a negative free cash outflow of R356 million and recorded a book loss of R272 million. Given that it only has net cash of R1.70 billion, the company may need to raise more capital if it does not break even soon. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce free cash flow regularly. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 4 warning signs for AYO Technology Solutions (2 are significant) of which you should be aware.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.