Is Avalon Advanced Materials (TSE:AVL) Using Too Much Debt?

By
Simply Wall St
Published
November 16, 2021
TSX:AVL
Source: Shutterstock

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Avalon Advanced Materials Inc. (TSE:AVL) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Avalon Advanced Materials

What Is Avalon Advanced Materials's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of May 2021 Avalon Advanced Materials had CA$3.42m of debt, an increase on CA$58.3k, over one year. However, because it has a cash reserve of CA$2.71m, its net debt is less, at about CA$708.9k.

debt-equity-history-analysis
TSX:AVL Debt to Equity History November 17th 2021

How Healthy Is Avalon Advanced Materials' Balance Sheet?

We can see from the most recent balance sheet that Avalon Advanced Materials had liabilities of CA$889.5k falling due within a year, and liabilities of CA$5.42m due beyond that. Offsetting these obligations, it had cash of CA$2.71m as well as receivables valued at CA$159.5k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$3.44m.

Of course, Avalon Advanced Materials has a market capitalization of CA$40.6m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 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 Avalon Advanced Materials has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

Caveat Emptor

While Avalon Advanced Materials's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CA$7.7m. 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 CA$2.8m of cash over the last year. So in short it's a really risky stock. 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 Avalon Advanced Materials has 6 warning signs (and 2 which can't be ignored) we think 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.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.