The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that AVIX,Inc. (TYO:7836) does use debt in its business. But is this debt a concern to shareholders?
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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for AVIXInc
What Is AVIXInc's Net Debt?
As you can see below, AVIXInc had JP¥776.0m of debt at September 2020, down from JP¥885.0m a year prior. However, it does have JP¥1.01b in cash offsetting this, leading to net cash of JP¥238.0m.
A Look At AVIXInc's Liabilities
We can see from the most recent balance sheet that AVIXInc had liabilities of JP¥365.0m falling due within a year, and liabilities of JP¥622.0m due beyond that. Offsetting these obligations, it had cash of JP¥1.01b as well as receivables valued at JP¥120.0m due within 12 months. So it can boast JP¥147.0m more liquid assets than total liabilities.
This surplus suggests that AVIXInc has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that AVIXInc has more cash than debt is arguably a good indication that it can manage its debt safely. 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 AVIXInc 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.
Over 12 months, AVIXInc reported revenue of JP¥941m, which is a gain of 4.6%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is AVIXInc?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year AVIXInc had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of JP¥69m and booked a JP¥134m accounting loss. But the saving grace is the JP¥238.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for AVIXInc that you should be aware of.
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.
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About TSE:7836
AVIXInc
Develops and sells light emitting diode (LED) display systems in Japan.
Flawless balance sheet and slightly overvalued.