Here's Why AudioValley (EPA:ALAVY) Can Afford Some Debt

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.' 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. Importantly, AudioValley SA (EPA:ALAVY) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for AudioValley

What Is AudioValley's Net Debt?

The image below, which you can click on for greater detail, shows that AudioValley had debt of €17.7m at the end of June 2020, a reduction from €24.6m over a year. However, it does have €700.0k in cash offsetting this, leading to net debt of about €17.0m.

How Strong Is AudioValley's Balance Sheet?

The latest balance sheet data shows that AudioValley had liabilities of €19.0m due within a year, and liabilities of €14.0m falling due after that. Offsetting these obligations, it had cash of €700.0k as well as receivables valued at €11.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €20.9m.

This is a mountain of leverage relative to its market capitalization of €33.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if AudioValley can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, AudioValley made a loss at the EBIT level, and saw its revenue drop to €21m, which is a fall of 23%. That makes us nervous, to say the least.

Caveat Emptor

Not only did AudioValley's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping €4.6m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €3.2m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that AudioValley is showing 6 warning signs in our investment analysis , and 3 of those shouldn't be ignored...

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. 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.
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