Is Amvis Holdings (TYO:7071) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Amvis Holdings, Inc. (TYO:7071) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Amvis Holdings

What Is Amvis Holdings's Debt?

As you can see below, at the end of December 2020, Amvis Holdings had JP¥7.75b of debt, up from JP¥2.08b a year ago. Click the image for more detail. However, because it has a cash reserve of JP¥3.20b, its net debt is less, at about JP¥4.55b.

How Strong Is Amvis Holdings' Balance Sheet?

According to the last reported balance sheet, Amvis Holdings had liabilities of JP¥3.57b due within 12 months, and liabilities of JP¥8.97b due beyond 12 months. On the other hand, it had cash of JP¥3.20b and JP¥2.30b worth of receivables due within a year. So it has liabilities totalling JP¥7.03b more than its cash and near-term receivables, combined.

Of course, Amvis Holdings has a market capitalization of JP¥161.5b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Amvis Holdings's net debt to EBITDA ratio of about 1.9 suggests only moderate use of debt. And its commanding EBIT of 16.6 times its interest expense, implies the debt load is as light as a peacock feather. It is well worth noting that Amvis Holdings's EBIT shot up like bamboo after rain, gaining 80% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Amvis Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Amvis Holdings saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

The good news is that Amvis Holdings's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But the stark truth is that we are concerned by its conversion of EBIT to free cash flow. We would also note that Healthcare industry companies like Amvis Holdings commonly do use debt without problems. Looking at all the aforementioned factors together, it strikes us that Amvis Holdings can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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 instance, we've identified 2 warning signs for Amvis Holdings (1 makes us a bit uncomfortable) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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