Is Avant Brands (TSE:AVNT) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Avant Brands Inc. (TSE:AVNT) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Avant Brands

How Much Debt Does Avant Brands Carry?

The image below, which you can click on for greater detail, shows that Avant Brands had debt of CA$8.07m at the end of August 2024, a reduction from CA$9.20m over a year. On the flip side, it has CA$4.18m in cash leading to net debt of about CA$3.89m.

How Strong Is Avant Brands' Balance Sheet?

The latest balance sheet data shows that Avant Brands had liabilities of CA$14.2m due within a year, and liabilities of CA$12.2m falling due after that. Offsetting this, it had CA$4.18m in cash and CA$3.33m in receivables that were due within 12 months. So it has liabilities totalling CA$19.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$12.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Avant Brands would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. 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's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Avant Brands produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$12m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CA$15m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Avant Brands (3 are a bit unpleasant!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.