Is AeroVironment (NASDAQ:AVAV) Using Too Much Debt?

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.' 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. Importantly, AeroVironment, Inc. (NASDAQ:AVAV) does carry debt. But is this debt a concern to shareholders?

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, 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for AeroVironment

What Is AeroVironment's Debt?

The image below, which you can click on for greater detail, shows that AeroVironment had debt of US$78.7m at the end of October 2023, a reduction from US$165.6m over a year. However, its balance sheet shows it holds US$100.9m in cash, so it actually has US$22.2m net cash.

A Look At AeroVironment's Liabilities

The latest balance sheet data shows that AeroVironment had liabilities of US$109.3m due within a year, and liabilities of US$103.7m falling due after that. Offsetting these obligations, it had cash of US$100.9m as well as receivables valued at US$221.4m due within 12 months. So it can boast US$109.4m more liquid assets than total liabilities.

This short term liquidity is a sign that AeroVironment could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, AeroVironment boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, AeroVironment turned things around in the last 12 months, delivering and EBIT of US$95m. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last year, AeroVironment burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that AeroVironment has net cash of US$22.2m, as well as more liquid assets than liabilities. So we don't have any problem with AeroVironment's use of debt. 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 .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.