Health Check: How Prudently Does Advicenne (EPA:ADVIC) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Advicenne S.A. (EPA:ADVIC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Advicenne

What Is Advicenne's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Advicenne had €14.1m of debt, an increase on €7.91m, over one year. But it also has €16.7m in cash to offset that, meaning it has €2.63m net cash.

How Healthy Is Advicenne's Balance Sheet?

The latest balance sheet data shows that Advicenne had liabilities of €5.71m due within a year, and liabilities of €13.9m falling due after that. Offsetting this, it had €16.7m in cash and €2.80m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Advicenne's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €89.4m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Advicenne also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Advicenne'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 Advicenne wasn't profitable at an EBIT level, but managed to grow its revenue by 41%, to €3.6m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Advicenne?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Advicenne had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €16m of cash and made a loss of €15m. With only €2.63m on the balance sheet, it would appear that its going to need to raise capital again soon. Advicenne's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. For example Advicenne has 6 warning signs (and 2 which are significant) we think you should know about.

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.

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.

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