Does BATM Advanced Communications (LON:BVC) Have A Healthy Balance Sheet?

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.' 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. Importantly, BATM Advanced Communications Ltd. (LON:BVC) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 BATM Advanced Communications

What Is BATM Advanced Communications's Net Debt?

You can click the graphic below for the historical numbers, but it shows that BATM Advanced Communications had US$2.99m of debt in December 2021, down from US$6.04m, one year before. However, its balance sheet shows it holds US$67.8m in cash, so it actually has US$64.8m net cash.

A Look At BATM Advanced Communications' Liabilities

Zooming in on the latest balance sheet data, we can see that BATM Advanced Communications had liabilities of US$57.9m due within 12 months and liabilities of US$11.1m due beyond that. Offsetting these obligations, it had cash of US$67.8m as well as receivables valued at US$31.3m due within 12 months. So it can boast US$30.0m more liquid assets than total liabilities.

This short term liquidity is a sign that BATM Advanced Communications could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, BATM Advanced Communications boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, BATM Advanced Communications's EBIT dived 17%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since BATM Advanced Communications will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While BATM Advanced Communications 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. Over the most recent two years, BATM Advanced Communications recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that BATM Advanced Communications has net cash of US$64.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in US$2.3m. So we are not troubled with BATM Advanced Communications's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with BATM Advanced Communications .

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.