Does Avillion Berhad (KLSE:AVI) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Avillion Berhad (KLSE:AVI) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Avillion Berhad

What Is Avillion Berhad's Debt?

As you can see below, Avillion Berhad had RM97.4m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had RM4.85m in cash, and so its net debt is RM92.6m.

How Healthy Is Avillion Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Avillion Berhad had liabilities of RM71.2m due within 12 months and liabilities of RM92.9m due beyond that. Offsetting this, it had RM4.85m in cash and RM7.36m in receivables that were due within 12 months. So its liabilities total RM151.9m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM80.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Avillion Berhad would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Avillion Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Avillion Berhad made a loss at the EBIT level, and saw its revenue drop to RM30m, which is a fall of 61%. That makes us nervous, to say the least.

Caveat Emptor

While Avillion Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RM21m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through RM6.1m in negative free cash flow over the last year. That means it's on the risky side of things. 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. We've identified 4 warning signs with Avillion Berhad (at least 1 which is significant) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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