Is Adval Tech Holding (VTX:ADVN) Using Debt In A Risky Way?

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.' 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 Adval Tech Holding AG (VTX:ADVN) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. 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 Adval Tech Holding

What Is Adval Tech Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Adval Tech Holding had CHF2.08m of debt, an increase on CHF574.0k, over one year. But on the other hand it also has CHF16.3m in cash, leading to a CHF14.2m net cash position.

How Healthy Is Adval Tech Holding's Balance Sheet?

The latest balance sheet data shows that Adval Tech Holding had liabilities of CHF31.1m due within a year, and liabilities of CHF5.91m falling due after that. Offsetting these obligations, it had cash of CHF16.3m as well as receivables valued at CHF27.2m due within 12 months. So it can boast CHF6.58m more liquid assets than total liabilities.

This surplus suggests that Adval Tech Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Adval Tech Holding boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Adval Tech Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Adval Tech Holding had a loss before interest and tax, and actually shrunk its revenue by 5.4%, to CHF169m. That's not what we would hope to see.

So How Risky Is Adval Tech Holding?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Adval Tech Holding had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CHF12m of cash and made a loss of CHF5.3m. However, it has net cash of CHF14.2m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Case in point: We've spotted 2 warning signs for Adval Tech Holding you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.