These 4 Measures Indicate That Aviation Links (TLV:AVIA) Is Using Debt Reasonably Well

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 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 should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out 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$6.26m of debt in December 2023, down from US$12.0m, one year before. But on the other hand it also has US$18.9m in cash, leading to a US$12.7m net cash position.

How Strong Is Aviation Links' Balance Sheet?

We can see from the most recent balance sheet that Aviation Links had liabilities of US$25.0m falling due within a year, and liabilities of US$4.53m due beyond that. Offsetting this, it had US$18.9m in cash and US$14.1m in receivables that were due within 12 months. So it can boast US$3.54m more liquid assets than total liabilities.

This short term liquidity is a sign that Aviation Links could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Aviation Links boasts net cash, so it's fair to say it does not have a heavy debt load!

Unfortunately, Aviation Links saw its EBIT slide 5.8% in the last twelve months. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. There's no doubt that we learn most about debt from the balance sheet. 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 two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Aviation Links has net cash of US$12.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$9.4m, being 114% of its EBIT. So we don't think Aviation Links's use of debt is 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 Aviation Links 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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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.