Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Avrot Industries Ltd (TLV:AVRT) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Avrot Industries
What Is Avrot Industries's Debt?
You can click the graphic below for the historical numbers, but it shows that Avrot Industries had ₪59.8m of debt in September 2020, down from ₪72.1m, one year before. However, it also had ₪6.31m in cash, and so its net debt is ₪53.5m.
A Look At Avrot Industries's Liabilities
According to the last reported balance sheet, Avrot Industries had liabilities of ₪89.5m due within 12 months, and liabilities of ₪32.3m due beyond 12 months. On the other hand, it had cash of ₪6.31m and ₪79.5m worth of receivables due within a year. 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 ₪69.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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%. That's not what we would hope to see.
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. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₪14m. In the meantime, we consider the stock very 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. Case in point: We've spotted 2 warning signs for Avrot Industries you should be aware of, and 1 of them is a bit concerning.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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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About TASE:AVRT
Avrot Industries
Engages in the lining and coating of steel pipes in Israel.
Flawless balance sheet very low.
