Is Avante Logixx (CVE:XX) A Risky Investment?

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 Avante Logixx Inc. (CVE:XX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Avante Logixx

What Is Avante Logixx's Net Debt?

As you can see below, Avante Logixx had CA$12.5m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have CA$559.4k in cash offsetting this, leading to net debt of about CA$11.9m.

How Strong Is Avante Logixx's Balance Sheet?

We can see from the most recent balance sheet that Avante Logixx had liabilities of CA$17.4m falling due within a year, and liabilities of CA$14.8m due beyond that. Offsetting this, it had CA$559.4k in cash and CA$18.7m in receivables that were due within 12 months. So its liabilities total CA$12.9m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Avante Logixx has a market capitalization of CA$31.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Avante Logixx's ability to maintain a healthy balance sheet going forward. 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 Avante Logixx wasn't profitable at an EBIT level, but managed to grow its revenue by 101%, to CA$90m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Even though Avante Logixx managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CA$971k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CA$3.7m into a profit. So to be blunt we do think it is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Avante Logixx (of which 1 makes us a bit uncomfortable!) you should know about.

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. 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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