Here's Why Avalon GloboCare (NASDAQ:AVCO) Can Afford Some Debt

By
Simply Wall St
Published
October 13, 2021
NasdaqCM:AVCO
Source: Shutterstock

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Avalon GloboCare Corp. (NASDAQ:AVCO) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Avalon GloboCare

How Much Debt Does Avalon GloboCare Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Avalon GloboCare had US$3.78m of debt, an increase on US$3.29m, over one year. On the flip side, it has US$685.3k in cash leading to net debt of about US$3.10m.

debt-equity-history-analysis
NasdaqCM:AVCO Debt to Equity History October 14th 2021

How Strong Is Avalon GloboCare's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Avalon GloboCare had liabilities of US$3.68m due within 12 months and liabilities of US$3.47m due beyond that. Offsetting these obligations, it had cash of US$685.3k as well as receivables valued at US$55.3k due within 12 months. So it has liabilities totalling US$6.41m more than its cash and near-term receivables, combined.

Of course, Avalon GloboCare has a market capitalization of US$87.1m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is Avalon GloboCare's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Avalon GloboCare had a loss before interest and tax, and actually shrunk its revenue by 8.8%, to US$1.3m. We would much prefer see growth.

Caveat Emptor

Importantly, Avalon GloboCare had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$11m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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$6.2m of cash over the last year. So in short it's a really risky stock. 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. We've identified 5 warning signs with Avalon GloboCare (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

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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