Is Avalon GloboCare (NASDAQ:AVCO) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Avalon GloboCare Corp. (NASDAQ:AVCO) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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 Avalon GloboCare

What Is Avalon GloboCare's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Avalon GloboCare had debt of US$3.59m, up from US$3.19m in one year. However, it also had US$726.6k in cash, and so its net debt is US$2.86m.

A Look At Avalon GloboCare's Liabilities

Zooming in on the latest balance sheet data, we can see that Avalon GloboCare had liabilities of US$2.59m due within 12 months and liabilities of US$3.66m due beyond that. Offsetting this, it had US$726.6k in cash and US$35.4k in receivables that were due within 12 months. So it has liabilities totalling US$5.49m more than its cash and near-term receivables, combined.

Of course, Avalon GloboCare has a market capitalization of US$86.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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 made a loss at the EBIT level, and saw its revenue drop to US$1.3m, which is a fall of 11%. We would much prefer see growth.

Caveat Emptor

While Avalon GloboCare's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$13m. 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$7.5m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 6 warning signs with Avalon GloboCare (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

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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