Is Avio (BIT:AVIO) A Risky Investment?

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. As with many other companies Avio S.p.A. (BIT:AVIO) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Avio

What Is Avio's Net Debt?

The image below, which you can click on for greater detail, shows that Avio had debt of €7.77m at the end of June 2024, a reduction from €17.1m over a year. But it also has €35.8m in cash to offset that, meaning it has €28.0m net cash.

A Look At Avio's Liabilities

Zooming in on the latest balance sheet data, we can see that Avio had liabilities of €618.0m due within 12 months and liabilities of €111.1m due beyond that. Offsetting these obligations, it had cash of €35.8m as well as receivables valued at €171.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €521.7m.

Given this deficit is actually higher than the company's market capitalization of €367.4m, we think shareholders really should watch Avio's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that Avio has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Also good is that Avio grew its EBIT at 12% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Avio's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Avio has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Avio generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Avio's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €28.0m. And it impressed us with free cash flow of -€70m, being 96% of its EBIT. So we don't have any problem with Avio's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Avio .

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.