Is BATM Advanced Communications (LON:BVC) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies BATM Advanced Communications Ltd. (LON:BVC) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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 BATM Advanced Communications

How Much Debt Does BATM Advanced Communications Carry?

As you can see below, BATM Advanced Communications had US$6.04m of debt at December 2020, down from US$6.68m a year prior. However, its balance sheet shows it holds US$53.4m in cash, so it actually has US$47.3m net cash.

A Look At BATM Advanced Communications' Liabilities

According to the last reported balance sheet, BATM Advanced Communications had liabilities of US$64.3m due within 12 months, and liabilities of US$17.1m due beyond 12 months. Offsetting these obligations, it had cash of US$53.4m as well as receivables valued at US$41.5m due within 12 months. So it actually has US$13.5m more liquid assets than total liabilities.

This surplus suggests that BATM Advanced Communications has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that BATM Advanced Communications has more cash than debt is arguably a good indication that it can manage its debt safely.

Although BATM Advanced Communications made a loss at the EBIT level, last year, it was also good to see that it generated US$14m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if BATM Advanced Communications 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Happily for any shareholders, BATM Advanced Communications actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case BATM Advanced Communications has US$47.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$15m, being 108% of its EBIT. So we don't think BATM Advanced Communications's use of debt is risky. 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. Be aware that BATM Advanced Communications is showing 1 warning sign in our investment analysis , 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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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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