Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Amiad Water Systems Ltd. (LON:AFS) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Amiad Water Systems

What Is Amiad Water Systems's Debt?

You can click the graphic below for the historical numbers, but it shows that Amiad Water Systems had US$11.8m of debt in December 2020, down from US$27.5m, one year before. But on the other hand it also has US$35.3m in cash, leading to a US$23.5m net cash position.

How Healthy Is Amiad Water Systems' Balance Sheet?

We can see from the most recent balance sheet that Amiad Water Systems had liabilities of US$39.1m falling due within a year, and liabilities of US$23.7m due beyond that. On the other hand, it had cash of US$35.3m and US$31.6m worth of receivables due within a year. So it can boast US$4.00m more liquid assets than total liabilities.

This short term liquidity is a sign that Amiad Water Systems could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Amiad Water Systems has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Amiad Water Systems grew its EBIT by 72% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Amiad Water Systems can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.