Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Avenira Limited (ASX:AEV) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.
Check out our latest analysis for Avenira
What Is Avenira's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2023 Avenira had AU$3.46m of debt, an increase on AU$3.20m, over one year. However, because it has a cash reserve of AU$3.27m, its net debt is less, at about AU$196.8k.
How Strong Is Avenira's Balance Sheet?
We can see from the most recent balance sheet that Avenira had liabilities of AU$4.32m falling due within a year, and liabilities of AU$2.18m due beyond that. Offsetting this, it had AU$3.27m in cash and AU$208.1k in receivables that were due within 12 months. So it has liabilities totalling AU$3.03m more than its cash and near-term receivables, combined.
Given Avenira has a market capitalization of AU$19.0m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Avenira has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is Avenira's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Since Avenira has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
Caveat Emptor
Over the last twelve months Avenira produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping AU$3.2m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$4.7m of cash over the last year. 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 instance, we've identified 6 warning signs for Avenira (4 are concerning) you should be aware of.
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.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About ASX:AEV
Moderate with adequate balance sheet.
