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.' 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. We note that Avenira Limited (ASX:AEV) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Avenira
What Is Avenira's Net Debt?
As you can see below, at the end of December 2022, Avenira had AU$3.33m of debt, up from AU$3.08m a year ago. Click the image for more detail. On the flip side, it has AU$1.42m in cash leading to net debt of about AU$1.91m.
A Look At Avenira's Liabilities
Zooming in on the latest balance sheet data, we can see that Avenira had liabilities of AU$995.5k due within 12 months and liabilities of AU$5.66m due beyond that. Offsetting these obligations, it had cash of AU$1.42m as well as receivables valued at AU$188.6k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$5.04m.
This deficit isn't so bad because Avenira is worth AU$17.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Avenira will need earnings to service that debt. 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.
Since Avenira has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
Caveat Emptor
Importantly, Avenira had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$3.9m 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. However, it doesn't help that it burned through AU$3.9m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 5 warning signs we've spotted with Avenira (including 2 which can't be ignored) .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
About ASX:AEV
Moderate with adequate balance sheet.
