Is Avantium (AMS:AVTX) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Avantium N.V. (AMS:AVTX) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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

See our latest analysis for Avantium

What Is Avantium's Net Debt?

As you can see below, at the end of June 2023, Avantium had €48.4m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has €56.6m in cash, leading to a €8.26m net cash position.

How Strong Is Avantium's Balance Sheet?

According to the last reported balance sheet, Avantium had liabilities of €47.8m due within 12 months, and liabilities of €71.9m due beyond 12 months. Offsetting this, it had €56.6m in cash and €9.74m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €53.3m.

While this might seem like a lot, it is not so bad since Avantium has a market capitalization of €160.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Avantium boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Avantium 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.

Over 12 months, Avantium reported revenue of €20m, which is a gain of 80%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Avantium?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Avantium lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €68m of cash and made a loss of €32m. However, it has net cash of €8.26m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Avantium may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Avantium (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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.