Does AeroVironment (NASDAQ:AVAV) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 AeroVironment, Inc. (NASDAQ:AVAV) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for AeroVironment

What Is AeroVironment's Net Debt?

The image below, which you can click on for greater detail, shows that AeroVironment had debt of US$38.8m at the end of January 2024, a reduction from US$165.8m over a year. However, its balance sheet shows it holds US$107.7m in cash, so it actually has US$68.9m net cash.

A Look At AeroVironment's Liabilities

Zooming in on the latest balance sheet data, we can see that AeroVironment had liabilities of US$107.5m due within 12 months and liabilities of US$59.8m due beyond that. Offsetting this, it had US$107.7m in cash and US$209.9m in receivables that were due within 12 months. So it actually has US$150.3m more liquid assets than total liabilities.

This surplus suggests that AeroVironment has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that AeroVironment has more cash than debt is arguably a good indication that it can manage its debt safely.

Although AeroVironment made a loss at the EBIT level, last year, it was also good to see that it generated US$103m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if AeroVironment 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While AeroVironment has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, AeroVironment reported free cash flow worth 9.1% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case AeroVironment has US$68.9m in net cash and a decent-looking balance sheet. So we are not troubled with AeroVironment's debt use. 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. To that end, you should be aware of the 1 warning sign we've spotted with AeroVironment .

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.

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