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. We note that AST SpaceMobile, Inc. (NASDAQ:ASTS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is AST SpaceMobile's Debt?

As you can see below, at the end of March 2024, AST SpaceMobile had US$161.1m of debt, up from US$4.70m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$210.0m in cash, so it actually has US$48.9m net cash.

How Healthy Is AST SpaceMobile's Balance Sheet?

The latest balance sheet data shows that AST SpaceMobile had liabilities of US$31.9m due within a year, and liabilities of US$184.0m falling due after that. Offsetting these obligations, it had cash of US$210.0m as well as receivables valued at US$1.15m due within 12 months. So its liabilities total US$4.76m more than the combination of its cash and short-term receivables.

This state of affairs indicates that AST SpaceMobile's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$1.17b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, AST SpaceMobile boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if AST SpaceMobile can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year AST SpaceMobile had a loss before interest and tax, and actually shrunk its revenue by 96%, to US$500k. That makes us nervous, to say the least.

So How Risky Is AST SpaceMobile?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that AST SpaceMobile had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$302m and booked a US$91m accounting loss. Given it only has net cash of US$48.9m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for AST SpaceMobile you should be aware of, and 3 of them are concerning.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.