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 Avinger, Inc. (NASDAQ:AVGR) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Avinger Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Avinger had US$12.5m of debt, an increase on US$8.58m, over one year. But on the other hand it also has US$25.3m in cash, leading to a US$12.8m net cash position.
A Look At Avinger's Liabilities
The latest balance sheet data shows that Avinger had liabilities of US$18.1m due within a year, and liabilities of US$4.40m falling due after that. Offsetting these obligations, it had cash of US$25.3m as well as receivables valued at US$1.34m due within 12 months. So it can boast US$4.18m more liquid assets than total liabilities.
This surplus suggests that Avinger has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Avinger boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Avinger's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Avinger's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
So How Risky Is Avinger?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Avinger had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$15m and booked a US$23m accounting loss. Given it only has net cash of US$12.8m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 3 warning signs for Avinger (1 is significant!) that you should be aware of before investing here.
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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