Would Avalon GloboCare (NASDAQ:AVCO) Be Better Off With Less 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.' 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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Avalon GloboCare

What Is Avalon GloboCare's Debt?

You can click the graphic below for the historical numbers, but it shows that Avalon GloboCare had US$3.24m of debt in March 2022, down from US$3.70m, one year before. However, it does have US$526.3k in cash offsetting this, leading to net debt of about US$2.71m.

How Healthy Is Avalon GloboCare's Balance Sheet?

According to the last reported balance sheet, Avalon GloboCare had liabilities of US$5.15m due within 12 months, and liabilities of US$3.24m due beyond 12 months. On the other hand, it had cash of US$526.3k and US$110.7k worth of receivables due within a year. So it has liabilities totalling US$7.75m more than its cash and near-term receivables, combined.

Since publicly traded Avalon GloboCare shares are worth a total of US$50.3m, it seems unlikely that this level of liabilities would be a major threat. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Avalon GloboCare reported revenue of US$1.3m, which is a gain of 2.6%, 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$8.7m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$4.0m 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. Be aware that Avalon GloboCare is showing 6 warning signs in our investment analysis , and 2 of those are potentially serious...

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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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.