Does Avrot Industries (TLV:AVRT) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Avrot Industries Ltd (TLV:AVRT) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Avrot Industries

How Much Debt Does Avrot Industries Carry?

The image below, which you can click on for greater detail, shows that Avrot Industries had debt of ₪59.8m at the end of September 2020, a reduction from ₪72.1m over a year. On the flip side, it has ₪6.31m in cash leading to net debt of about ₪53.5m.

How Healthy Is Avrot Industries' Balance Sheet?

The latest balance sheet data shows that Avrot Industries had liabilities of ₪89.5m due within a year, and liabilities of ₪32.3m falling due after that. Offsetting these obligations, it had cash of ₪6.31m as well as receivables valued at ₪79.5m due within 12 months. So its liabilities total ₪36.0m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Avrot Industries has a market capitalization of ₪115.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Avrot Industries will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Avrot Industries made a loss at the EBIT level, and saw its revenue drop to ₪140m, which is a fall of 10%. We would much prefer see growth.

Caveat Emptor

While Avrot Industries's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₪6.6m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of ₪14m into a profit. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Avrot Industries (1 shouldn't be ignored) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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