Is Avalon Advanced Materials (TSE:AVL) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Avalon Advanced Materials Inc. (TSE:AVL) does use debt in its business. But should shareholders be worried about its use of debt?

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Avalon Advanced Materials's Debt?

The image below, which you can click on for greater detail, shows that at February 2025 Avalon Advanced Materials had debt of CA$8.92m, up from CA$3.12m in one year. However, because it has a cash reserve of CA$1.61m, its net debt is less, at about CA$7.30m.

How Strong Is Avalon Advanced Materials' Balance Sheet?

We can see from the most recent balance sheet that Avalon Advanced Materials had liabilities of CA$2.93m falling due within a year, and liabilities of CA$7.75m due beyond that. Offsetting this, it had CA$1.61m in cash and CA$87.0k in receivables that were due within 12 months. So it has liabilities totalling CA$8.98m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Avalon Advanced Materials has a market capitalization of CA$22.1m, 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 you can't view debt in total isolation; since Avalon Advanced Materials will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

See our latest analysis for Avalon Advanced Materials

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

Caveat Emptor

Not only did Avalon Advanced Materials's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CA$4.8m. 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 CA$5.3m of cash over the last year. So suffice it to say we consider the stock very risky. 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. To that end, you should learn about the 4 warning signs we've spotted with Avalon Advanced Materials (including 3 which are significant) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.