Would Avalon Advanced Materials (TSE:AVL) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Avalon Advanced Materials Inc. (TSE:AVL) does have debt on its balance sheet. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Avalon Advanced Materials's Debt?

You can click the graphic below for the historical numbers, but it shows that as of November 2024 Avalon Advanced Materials had CA$9.30m of debt, an increase on CA$3.07m, over one year. However, it does have CA$3.13m in cash offsetting this, leading to net debt of about CA$6.17m.

A Look At Avalon Advanced Materials' Liabilities

Zooming in on the latest balance sheet data, we can see that Avalon Advanced Materials had liabilities of CA$4.03m due within 12 months and liabilities of CA$7.68m due beyond that. On the other hand, it had cash of CA$3.13m and CA$77.0k worth of receivables due within a year. So it has liabilities totalling CA$8.51m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Avalon Advanced Materials is worth CA$19.8m, 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 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.

View 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

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$5.8m. 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. Another cause for caution is that is bled CA$4.9m in negative free cash flow over the last twelve months. 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. We've identified 4 warning signs with Avalon Advanced Materials (at least 3 which don't sit too well with us) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.