Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that AstiVita Limited (ASX:AIR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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 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.
See our latest analysis for AstiVita
What Is AstiVita's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 AstiVita had AU$3.65m of debt, an increase on AU$1.34m, over one year. However, it also had AU$236.0k in cash, and so its net debt is AU$3.41m.
A Look At AstiVita's Liabilities
Zooming in on the latest balance sheet data, we can see that AstiVita had liabilities of AU$1.35m due within 12 months and liabilities of AU$3.79m due beyond that. Offsetting this, it had AU$236.0k in cash and AU$363.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$4.54m.
AstiVita has a market capitalization of AU$14.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is AstiVita's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year AstiVita had a loss before interest and tax, and actually shrunk its revenue by 11%, to AU$4.2m. That's not what we would hope to see.
Caveat Emptor
Not only did AstiVita's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable AU$1.7m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$2.6m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 4 warning signs for AstiVita (2 are a bit unpleasant!) that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. 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.
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About ASX:AIR
AstiVita
AstiVita Limited imports and distributes household and renewable energy products in Australia.
Mediocre balance sheet with weak fundamentals.
