Is BATM Advanced Communications (LON:BVC) Using Debt Sensibly?

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.' 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. We note that BATM Advanced Communications Ltd. (LON:BVC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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

What Is BATM Advanced Communications's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 BATM Advanced Communications had debt of US$5.63m, up from US$4.74m in one year. But it also has US$41.9m in cash to offset that, meaning it has US$36.3m net cash.

How Strong Is BATM Advanced Communications' Balance Sheet?

According to the last reported balance sheet, BATM Advanced Communications had liabilities of US$51.1m due within 12 months, and liabilities of US$7.30m due beyond 12 months. Offsetting these obligations, it had cash of US$41.9m as well as receivables valued at US$34.2m due within 12 months. So it actually has US$17.7m 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! 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 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 made a loss at the EBIT level, and saw its revenue drop to US$119m, which is a fall of 5.8%. We would much prefer see growth.

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$170k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. These risks can be hard to spot. 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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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.