Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Aviat Networks, Inc. (NASDAQ:AVNW) 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Aviat Networks's Debt?
As you can see below, Aviat Networks had US$9.00m of debt, at September 2019, which is about the same the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$34.5m in cash, so it actually has US$25.5m net cash.
How Healthy Is Aviat Networks's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Aviat Networks had liabilities of US$88.3m due within 12 months and liabilities of US$18.0m due beyond that. On the other hand, it had cash of US$34.5m and US$73.6m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.
This short term liquidity is a sign that Aviat Networks could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Aviat Networks boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Aviat Networks grew its EBIT by 78% 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 it is future earnings, more than anything, that will determine Aviat Networks'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Aviat Networks has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Aviat Networks recorded free cash flow worth 74% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to investigate a company's debt, in this case Aviat Networks has US$25.5m in net cash and a decent-looking balance sheet. And we liked the look of last year's 78% year-on-year EBIT growth. So we don't think Aviat Networks's use of debt is risky. We'd be very excited to see if Aviat Networks insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
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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