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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for BATM Advanced Communications

How Much Debt Does BATM Advanced Communications Carry?

The image below, which you can click on for greater detail, shows that at December 2022 BATM Advanced Communications had debt of US$4.24m, up from US$2.99m in one year. But on the other hand it also has US$44.2m in cash, leading to a US$39.9m net cash position.

How Healthy Is BATM Advanced Communications' Balance Sheet?

We can see from the most recent balance sheet that BATM Advanced Communications had liabilities of US$51.3m falling due within a year, and liabilities of US$9.89m due beyond that. On the other hand, it had cash of US$44.2m and US$31.9m worth of receivables due within a year. So it actually has US$14.9m 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. Succinctly put, BATM Advanced Communications boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that BATM Advanced Communications's EBIT was down 95% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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. In the last three years, BATM Advanced Communications's free cash flow amounted to 38% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case BATM Advanced Communications has US$39.9m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about BATM Advanced Communications's balance sheet. 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. Be aware that BATM Advanced Communications is showing 3 warning signs in our investment analysis , 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.

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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.