Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Aspen Group, Inc. (NASDAQ:ASPU) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Aspen Group’s Debt?

You can click the graphic below for the historical numbers, but it shows that as of October 2021 Aspen Group had US$5.00m of debt, an increase on none, over one year. But on the other hand it also has US$11.0m in cash, leading to a US$5.99m net cash position.

A Look At Aspen Group’s Liabilities

Zooming in on the latest balance sheet data, we can see that Aspen Group had liabilities of US$19.5m due within 12 months and liabilities of US$22.7m due beyond that. On the other hand, it had cash of US$11.0m and US$21.3m worth of receivables due within a year. So it has liabilities totalling US$9.97m more than its cash and near-term receivables, combined.

Since publicly traded Aspen Group shares are worth a total of US$65.6m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Aspen Group 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 Group’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, Aspen Group reported revenue of US$74m, which is a gain of 26%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Aspen Group?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Aspen Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$10.0m of cash and made a loss of US$8.9m. However, it has net cash of US$5.99m, so it has a bit of time before it will need more capital. Aspen Group’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.