Is Avient (NYSE:AVNT) 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.' 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 note that Avient Corporation (NYSE:AVNT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

We've discovered 3 warning signs about Avient. View them for free.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Avient's Debt?

The chart below, which you can click on for greater detail, shows that Avient had US$2.07b in debt in March 2025; about the same as the year before. However, it also had US$456.0m in cash, and so its net debt is US$1.61b.

How Strong Is Avient's Balance Sheet?

We can see from the most recent balance sheet that Avient had liabilities of US$698.2m falling due within a year, and liabilities of US$2.80b due beyond that. Offsetting this, it had US$456.0m in cash and US$489.6m in receivables that were due within 12 months. So its liabilities total US$2.55b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$3.25b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

See our latest analysis for Avient

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With net debt to EBITDA of 3.2 Avient has a fairly noticeable amount of debt. On the plus side, its EBIT was 9.1 times its interest expense, and its net debt to EBITDA, was quite high, at 3.2. Unfortunately, Avient saw its EBIT slide 7.2% in the last twelve months. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Avient can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, Avient's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

Neither Avient's ability to handle its total liabilities nor its EBIT growth rate gave us confidence in its ability to take on more debt. But we do take some comfort from its interest cover. Taking the abovementioned factors together we do think Avient's debt poses some risks to the business. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Avient (of which 1 is concerning!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.