Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Invion Limited (ASX:IVX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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.
How Much Debt Does Invion Carry?
The image below, which you can click on for greater detail, shows that Invion had debt of AU$21.3k at the end of December 2018, a reduction from AU$1.26m over a year. But on the other hand it also has AU$642.2k in cash, leading to a AU$621.0k net cash position.
How Strong Is Invion's Balance Sheet?
The latest balance sheet data shows that Invion had liabilities of AU$1.13m due within a year, and liabilities of AU$487.0k falling due after that. On the other hand, it had cash of AU$642.2k and AU$842.7k worth of receivables due within a year. So its liabilities total AU$127.1k more than the combination of its cash and short-term receivables.
This state of affairs indicates that Invion's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the AU$82.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Invion boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Invion's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
While it hasn't made a profit, at least Invion booked its first revenue as a publicly listed company, in the last twelve months.
So How Risky Is Invion?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Invion lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$1.0m of cash and made a loss of AU$5.0m. With only AU$642k on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Invion's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Invion insider transactions.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.