Health Check: How Prudently Does BATM Advanced Communications (LON:BVC) Use Debt?

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.' 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 can see that BATM Advanced Communications Ltd. (LON:BVC) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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$5.35m of debt in June 2020, down from US$6.41m, one year before. However, its balance sheet shows it holds US$44.3m in cash, so it actually has US$38.9m net cash.

How Strong Is BATM Advanced Communications's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BATM Advanced Communications had liabilities of US$59.4m due within 12 months and liabilities of US$17.0m due beyond that. On the other hand, it had cash of US$44.3m and US$47.2m worth of receivables due within a year. So it actually has US$15.0m 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! 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 BATM Advanced Communications'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.

Over 12 months, BATM Advanced Communications reported revenue of US$145m, which is a gain of 23%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is BATM Advanced Communications?

While BATM Advanced Communications lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$4.9m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 23% is a good sign. We'd see further strong growth as an optimistic indication. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for BATM Advanced Communications you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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