Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Avid Electronics Corp. (GTSM:6103) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Avid Electronics
How Much Debt Does Avid Electronics Carry?
You can click the graphic below for the historical numbers, but it shows that Avid Electronics had NT$207.6m of debt in September 2020, down from NT$650.2m, one year before. Net debt is about the same, since the it doesn't have much cash.
How Healthy Is Avid Electronics's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Avid Electronics had liabilities of NT$218.1m due within 12 months and liabilities of NT$664.0k due beyond that. Offsetting these obligations, it had cash of NT$3.36m as well as receivables valued at NT$284.8m due within 12 months. So it actually has NT$69.4m more liquid assets than total liabilities.
This surplus suggests that Avid Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Avid Electronics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Avid Electronics had a loss before interest and tax, and actually shrunk its revenue by 87%, to NT$289m. That makes us nervous, to say the least.
Caveat Emptor
While Avid Electronics'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 NT$13m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But a profit would do more to inspire us to research the business more closely. This one is a bit too risky for our liking. 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. For instance, we've identified 3 warning signs for Avid Electronics (1 doesn't sit too well with us) 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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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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About TPEX:6103
Adequate balance sheet with acceptable track record.
