Is AeroVironment (NASDAQ:AVAV) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, AeroVironment, Inc. (NASDAQ:AVAV) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for AeroVironment

What Is AeroVironment's Net Debt?

As you can see below, AeroVironment had US$16.8m of debt at July 2024, down from US$128.5m a year prior. However, its balance sheet shows it holds US$81.2m in cash, so it actually has US$64.4m net cash.

A Look At AeroVironment's Liabilities

We can see from the most recent balance sheet that AeroVironment had liabilities of US$117.4m falling due within a year, and liabilities of US$36.3m due beyond that. Offsetting these obligations, it had cash of US$81.2m as well as receivables valued at US$255.6m due within 12 months. So it can boast US$183.1m 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. Succinctly put, AeroVironment boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, AeroVironment grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if AeroVironment can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. AeroVironment may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last two years, AeroVironment basically broke even on a free cash flow basis. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that AeroVironment has net cash of US$64.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 34% year-on-year EBIT growth. So is AeroVironment's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - AeroVironment has 1 warning sign we think 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.