Does Avalon GloboCare (NASDAQ:AVCO) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Avalon GloboCare Corp. (NASDAQ:AVCO) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Avalon GloboCare

What Is Avalon GloboCare's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Avalon GloboCare had debt of US$4.35m, up from US$3.29m in one year. However, because it has a cash reserve of US$532.3k, its net debt is less, at about US$3.82m.

How Healthy Is Avalon GloboCare's Balance Sheet?

We can see from the most recent balance sheet that Avalon GloboCare had liabilities of US$4.54m falling due within a year, and liabilities of US$4.00m due beyond that. Offsetting this, it had US$532.3k in cash and US$93.3k in receivables that were due within 12 months. So it has liabilities totalling US$7.91m more than its cash and near-term receivables, combined.

Of course, Avalon GloboCare has a market capitalization of US$68.2m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Avalon GloboCare will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Avalon GloboCare reported revenue of US$1.4m, which is a gain of 6.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Avalon GloboCare had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$9.7m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$4.7m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Avalon GloboCare has 6 warning signs (and 2 which can't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.