Avon Protection (LON:AVON) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Avon Protection plc (LON:AVON) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Avon Protection

What Is Avon Protection's Debt?

You can click the graphic below for the historical numbers, but it shows that Avon Protection had US$12.9m of debt in March 2021, down from US$66.7m, one year before. However, its balance sheet shows it holds US$190.1m in cash, so it actually has US$177.2m net cash.

How Strong Is Avon Protection's Balance Sheet?

According to the last reported balance sheet, Avon Protection had liabilities of US$69.7m due within 12 months, and liabilities of US$140.8m due beyond 12 months. Offsetting these obligations, it had cash of US$190.1m as well as receivables valued at US$54.3m due within 12 months. So it actually has US$33.9m more liquid assets than total liabilities.

This surplus suggests that Avon Protection has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Avon Protection boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Avon Protection grew its EBIT by 759% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Avon Protection's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Avon Protection has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, Avon Protection actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While it is always sensible to investigate a company's debt, in this case Avon Protection has US$177.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 759% over the last year. So we don't have any problem with Avon Protection's use of debt. 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. Case in point: We've spotted 4 warning signs for Avon Protection you should be aware of, and 1 of them is potentially serious.

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.
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