Is Avenira (ASX:AEV) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Avenira Limited (ASX:AEV) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Avenira

How Much Debt Does Avenira Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Avenira had AU$2.48m of debt, an increase on none, over one year. But on the other hand it also has AU$3.12m in cash, leading to a AU$643.0k net cash position.

How Healthy Is Avenira's Balance Sheet?

According to the last reported balance sheet, Avenira had liabilities of AU$640.1k due within 12 months, and liabilities of AU$4.26m due beyond 12 months. Offsetting these obligations, it had cash of AU$3.12m as well as receivables valued at AU$129.2k due within 12 months. So its liabilities total AU$1.65m more than the combination of its cash and short-term receivables.

Avenira has a market capitalization of AU$6.90m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Avenira also has more cash than debt, so we're pretty confident it can manage its debt safely. 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Avenira finds some valuable resources, before it runs out of money.

So How Risky Is Avenira?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Avenira lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$2.9m of cash and made a loss of AU$2.1m. Given it only has net cash of AU$643.0k, 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Avenira that you should be aware of before investing here.

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.
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