Is AVITA Medical (NASDAQ:RCEL) A Risky Investment?

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.' 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. As with many other companies AVITA Medical, Inc. (NASDAQ:RCEL) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for AVITA Medical

How Much Debt Does AVITA Medical Carry?

The image below, which you can click on for greater detail, shows that at March 2024 AVITA Medical had debt of US$41.3m, up from none in one year. But on the other hand it also has US$68.2m in cash, leading to a US$26.9m net cash position.

A Look At AVITA Medical's Liabilities

The latest balance sheet data shows that AVITA Medical had liabilities of US$11.9m due within a year, and liabilities of US$53.0m falling due after that. Offsetting these obligations, it had cash of US$68.2m as well as receivables valued at US$9.37m due within 12 months. So it can boast US$12.7m more liquid assets than total liabilities.

This short term liquidity is a sign that AVITA Medical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, AVITA Medical boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine AVITA Medical'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.

Over 12 months, AVITA Medical reported revenue of US$51m, which is a gain of 35%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is AVITA Medical?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months AVITA Medical lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$52m and booked a US$45m accounting loss. But at least it has US$26.9m on the balance sheet to spend on growth, near-term. AVITA Medical's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. To that end, you should be aware of the 2 warning signs we've spotted with AVITA Medical .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com