Is Avalon GloboCare (NASDAQ:AVCO) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, Avalon GloboCare Corp. (NASDAQ:AVCO) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Avalon GloboCare

How Much Debt Does Avalon GloboCare Carry?

As you can see below, at the end of September 2020, Avalon GloboCare had US$3.29m of debt, up from US$590.0k a year ago. Click the image for more detail. However, it does have US$1.40m in cash offsetting this, leading to net debt of about US$1.89m.

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$2.44m due within 12 months and liabilities of US$3.37m due beyond that. On the other hand, it had cash of US$1.40m and US$97.4k worth of receivables due within a year. So its liabilities total US$4.32m more than the combination of its cash and short-term receivables.

Of course, Avalon GloboCare has a market capitalization of US$91.2m, 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Avalon GloboCare will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Avalon GloboCare wasn't profitable at an EBIT level, but managed to grow its revenue by 3.6%, to US$1.4m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Avalon GloboCare produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$15m. 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$7.9m 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. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Avalon GloboCare has 6 warning signs (and 2 which don't sit too well with us) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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