Does Avant Brands (TSE:AVNT) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Avant Brands Inc. (TSE:AVNT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Avant Brands

What Is Avant Brands's Debt?

As you can see below, at the end of May 2023, Avant Brands had CA$9.14m of debt, up from none a year ago. Click the image for more detail. However, it also had CA$800.0k in cash, and so its net debt is CA$8.34m.

How Healthy Is Avant Brands' Balance Sheet?

The latest balance sheet data shows that Avant Brands had liabilities of CA$12.3m due within a year, and liabilities of CA$9.19m falling due after that. Offsetting these obligations, it had cash of CA$800.0k as well as receivables valued at CA$6.57m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$14.2m.

Avant Brands has a market capitalization of CA$54.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Avant Brands's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Avant Brands wasn't profitable at an EBIT level, but managed to grow its revenue by 102%, to CA$27m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, Avant Brands still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$2.8m 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. Another cause for caution is that is bled CA$710k in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Avant Brands , and understanding them should be part of your investment process.

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.