Is Avision (TWSE:2380) Using Debt In A Risky Way?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Avision Inc. (TWSE:2380) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Avision

What Is Avision's Debt?

As you can see below, Avision had NT$751.0m of debt at September 2024, down from NT$849.7m a year prior. However, because it has a cash reserve of NT$277.3m, its net debt is less, at about NT$473.7m.

A Look At Avision's Liabilities

According to the last reported balance sheet, Avision had liabilities of NT$1.35b due within 12 months, and liabilities of NT$190.3m due beyond 12 months. On the other hand, it had cash of NT$277.3m and NT$335.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$930.1m.

This deficit is considerable relative to its market capitalization of NT$979.7m, so it does suggest shareholders should keep an eye on Avision's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Avision'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 Avision wasn't profitable at an EBIT level, but managed to grow its revenue by 38%, to NT$2.6b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Avision's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping NT$304m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of NT$298m. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Avision 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. 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.