Is Avillion Berhad (KLSE:AVI) A Risky Investment?

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.' 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. Importantly, Avillion Berhad (KLSE:AVI) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that AVI is potentially overvalued!

What Is Avillion Berhad's Net Debt?

As you can see below, Avillion Berhad had RM87.8m of debt at June 2022, down from RM102.2m a year prior. On the flip side, it has RM5.02m in cash leading to net debt of about RM82.8m.

How Strong Is Avillion Berhad's Balance Sheet?

The latest balance sheet data shows that Avillion Berhad had liabilities of RM61.9m due within a year, and liabilities of RM85.0m falling due after that. Offsetting this, it had RM5.02m in cash and RM8.18m in receivables that were due within 12 months. So it has liabilities totalling RM133.7m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's RM119.0m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Avillion Berhad'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.

In the last year Avillion Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 108%, to RM43m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, Avillion Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM1.0m 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 RM4.0m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Avillion Berhad (2 are a bit unpleasant) you should be aware of.

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. 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.