Stock Analysis

These 4 Measures Indicate That Avantor (NYSE:AVTR) Is Using Debt Reasonably Well

  •  Updated
NYSE:AVTR
Source: Shutterstock

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Avantor, Inc. (NYSE:AVTR) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Avantor

What Is Avantor's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Avantor had debt of US$5.59b, up from US$5.00b in one year. However, it also had US$1.43b in cash, and so its net debt is US$4.16b.

debt-equity-history-analysis
NYSE:AVTR Debt to Equity History October 30th 2021

A Look At Avantor's Liabilities

We can see from the most recent balance sheet that Avantor had liabilities of US$1.32b falling due within a year, and liabilities of US$6.77b due beyond that. Offsetting this, it had US$1.43b in cash and US$1.18b in receivables that were due within 12 months. So its liabilities total US$5.48b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Avantor is worth a massive US$23.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Avantor's debt is 3.0 times its EBITDA, and its EBIT cover its interest expense 4.7 times over. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. Importantly, Avantor grew its EBIT by 55% over the last twelve months, and that growth will make it easier to handle its debt. 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 Avantor 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Avantor generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

The good news is that Avantor's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But truth be told we feel its net debt to EBITDA does undermine this impression a bit. Taking all this data into account, it seems to us that Avantor takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Avantor has 3 warning signs (and 1 which is significant) we think you should know about.

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.

What are the risks and opportunities for Avantor?

Avantor, Inc. provides products and services to customers in biopharma, healthcare, education and government, advanced technologies, and applied materials industries in the Americas, Europe, Asia, the Middle East, and Africa.

View Full Analysis

Rewards

  • Price-To-Earnings ratio (26.5x) is below the Life Sciences industry average (31.1x)

  • Earnings are forecast to grow 12.26% per year

  • Earnings grew by 28.5% over the past year

Risks

  • Debt is not well covered by operating cash flow

  • Shareholders have been diluted in the past year

View all Risks and Rewards

Share Price

Market Cap

1Y Return

View Company Report