AVIXInc (TSE:7836) Seems To Use Debt Rather Sparingly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that AVIX,Inc. (TSE:7836) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for AVIXInc

What Is AVIXInc's Net Debt?

As you can see below, AVIXInc had JP¥460.0m of debt at September 2024, down from JP¥498.0m a year prior. But on the other hand it also has JP¥921.0m in cash, leading to a JP¥461.0m net cash position.

How Strong Is AVIXInc's Balance Sheet?

The latest balance sheet data shows that AVIXInc had liabilities of JP¥624.0m due within a year, and liabilities of JP¥501.0m falling due after that. Offsetting these obligations, it had cash of JP¥921.0m as well as receivables valued at JP¥609.0m due within 12 months. So it can boast JP¥405.0m more liquid assets than total liabilities.

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

On top of that, AVIXInc grew its EBIT by 78% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is AVIXInc's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. AVIXInc 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. Over the last two years, AVIXInc actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that AVIXInc has net cash of JP¥461.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 289% of that EBIT to free cash flow, bringing in JP¥516m. So is AVIXInc's debt a risk? It doesn't seem so to us. 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. For example - AVIXInc has 2 warning signs we think 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.