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 Arcimoto, Inc. (NASDAQ:FUV) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Arcimoto
What Is Arcimoto’s Debt?
The image below, which you can click on for greater detail, shows that at December 2021 Arcimoto had debt of US$3.72m, up from US$3.14m in one year. But on the other hand it also has US$17.0m in cash, leading to a US$13.3m net cash position.
A Look At Arcimoto’s Liabilities
According to the last reported balance sheet, Arcimoto had liabilities of US$8.61m due within 12 months, and liabilities of US$2.24m due beyond 12 months. Offsetting these obligations, it had cash of US$17.0m as well as receivables valued at US$127.9k due within 12 months. So it can boast US$6.25m more liquid assets than total liabilities.
This short term liquidity is a sign that Arcimoto could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Arcimoto has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Arcimoto can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Arcimoto wasn’t profitable at an EBIT level, but managed to grow its revenue by 102%, to US$4.4m. So there’s no doubt that shareholders are cheering for growth
So How Risky Is Arcimoto?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Arcimoto had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$57m of cash and made a loss of US$48m. With only US$13.3m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Arcimoto has dazzling revenue growth, so there’s a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we’ve spotted 4 warning signs for Arcimoto (of which 1 makes us a bit uncomfortable!) you should know about.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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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.