Does Aviation Links (TLV:AVIA) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Aviation Links Ltd (TLV:AVIA) does carry debt. But the more important question is: how much risk is that debt creating?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Aviation Links

How Much Debt Does Aviation Links Carry?

The image below, which you can click on for greater detail, shows that Aviation Links had debt of US$12.0m at the end of December 2022, a reduction from US$19.1m over a year. But it also has US$17.8m in cash to offset that, meaning it has US$5.82m net cash.

How Strong Is Aviation Links' Balance Sheet?

According to the last reported balance sheet, Aviation Links had liabilities of US$45.4m due within 12 months, and liabilities of US$9.60m due beyond 12 months. Offsetting these obligations, it had cash of US$17.8m as well as receivables valued at US$22.4m due within 12 months. So its liabilities total US$14.8m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Aviation Links has a market capitalization of US$31.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Aviation Links boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Aviation Links turned things around in the last 12 months, delivering and EBIT of US$13m. 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 Aviation Links 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.

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. Happily for any shareholders, Aviation Links actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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$5.82m. And it impressed us with free cash flow of US$18m, being 147% of its EBIT. So we don't have any problem with Aviation Links's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Aviation Links (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.