Is AVITA Medical (NASDAQ:RCEL) Using Debt Sensibly?

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.' 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. We can see that AVITA Medical, Inc. (NASDAQ:RCEL) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for AVITA Medical

What Is AVITA Medical's Debt?

As you can see below, at the end of September 2024, AVITA Medical had US$42.5m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$44.4m in cash, so it actually has US$1.86m net cash.

How Strong Is AVITA Medical's Balance Sheet?

According to the last reported balance sheet, AVITA Medical had liabilities of US$17.1m due within 12 months, and liabilities of US$51.7m due beyond 12 months. Offsetting this, it had US$44.4m in cash and US$10.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$13.9m.

Of course, AVITA Medical has a market capitalization of US$354.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, 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 ultimately the future profitability of the business will decide if AVITA Medical 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.

In the last year AVITA Medical wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to US$60m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is AVITA Medical?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year AVITA Medical had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$60m and booked a US$57m accounting loss. With only US$1.86m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for AVITA Medical 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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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.