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

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.' 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. Importantly, Avant Brands Inc. (TSE:AVNT) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Avant Brands

What Is Avant Brands's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of August 2023 Avant Brands had CA$9.20m of debt, an increase on none, over one year. However, because it has a cash reserve of CA$1.72m, its net debt is less, at about CA$7.49m.

How Strong Is Avant Brands' Balance Sheet?

We can see from the most recent balance sheet that Avant Brands had liabilities of CA$18.2m falling due within a year, and liabilities of CA$11.3m due beyond that. Offsetting these obligations, it had cash of CA$1.72m as well as receivables valued at CA$5.33m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$22.5m.

This is a mountain of leverage relative to its market capitalization of CA$33.8m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Avant Brands reported revenue of CA$29m, which is a gain of 102%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

While we can certainly appreciate Avant Brands's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CA$1.0m 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. For example, we would not want to see a repeat of last year's loss of CA$4.6m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Avant Brands is showing 2 warning signs in our investment analysis , you should know about...

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.