Aviation Links (TLV:AVIA) Seems To Use Debt Quite 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 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, Aviation Links Ltd (TLV:AVIA) does carry debt. But should shareholders be worried about its use of debt?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Aviation Links

What Is Aviation Links's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Aviation Links had US$13.4m of debt in September 2022, down from US$19.1m, one year before. However, its balance sheet shows it holds US$13.6m in cash, so it actually has US$168.0k net cash.

A Look At Aviation Links' Liabilities

Zooming in on the latest balance sheet data, we can see that Aviation Links had liabilities of US$49.8m due within 12 months and liabilities of US$10.7m due beyond that. On the other hand, it had cash of US$13.6m and US$43.7m worth of receivables due within a year. So it has liabilities totalling US$3.21m more than its cash and near-term receivables, combined.

Given Aviation Links has a market capitalization of US$23.8m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Aviation Links boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Aviation Links made a loss at the EBIT level, last year, it was also good to see that it generated US$10m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Aviation Links's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Aviation Links may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Aviation Links actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Aviation Links's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$168.0k. The cherry on top was that in converted 119% of that EBIT to free cash flow, bringing in US$12m. So we don't think Aviation Links's use of debt is 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. Be aware that Aviation Links is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.