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.' 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. We can see that Avanti Feeds Limited (NSE:AVANTI) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
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What Is Avanti Feeds's Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Avanti Feeds had debt of ₹93.4m, up from ₹68.7m in one year. However, its balance sheet shows it holds ₹7.10b in cash, so it actually has ₹7.01b net cash.
How Strong Is Avanti Feeds's Balance Sheet?
The latest balance sheet data shows that Avanti Feeds had liabilities of ₹2.20b due within a year, and liabilities of ₹375.7m falling due after that. Offsetting these obligations, it had cash of ₹7.10b as well as receivables valued at ₹660.3m due within 12 months. So it actually has ₹5.19b more liquid assets than total liabilities.
This surplus suggests that Avanti Feeds has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Avanti Feeds has more cash than debt is arguably a good indication that it can manage its debt safely.
In fact Avanti Feeds's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Avanti Feeds's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.