These 4 Measures Indicate That BATM Advanced Communications (LON:BVC) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies BATM Advanced Communications Ltd. (LON:BVC) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Debt?

As you can see below, BATM Advanced Communications had US$5.04m of debt at June 2024, down from US$5.63m a year prior. But it also has US$32.6m in cash to offset that, meaning it has US$27.6m 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$43.2m due within 12 months and liabilities of US$9.64m due beyond that. Offsetting this, it had US$32.6m in cash and US$37.2m in receivables that were due within 12 months. So it actually has US$17.0m more liquid assets than total liabilities.

This surplus suggests that BATM Advanced Communications is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, BATM Advanced Communications boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that BATM Advanced Communications improved its EBIT from a last year's loss to a positive US$1.6m. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. During the last year, BATM Advanced Communications burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

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$27.6m, as well as more liquid assets than liabilities. So we don't have any problem with BATM Advanced Communications's use of debt. 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. For example - BATM Advanced Communications has 2 warning signs we think you should be aware of.

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.