Is AWN Holdings (ASX: AWN) weighing on its debt?
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that AWN Holdings Limited (ASX: AWN) uses debt in its business. But the real question is whether this debt makes the business risky.
When Is Debt a Problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest analysis for AWN Holdings
What is the debt of AWN Holdings?
As you can see below, at the end of December 2020, AWN Holdings was in debt of A $ 5.76 million, up from A $ 1.73 million a year ago. Click on the image for more details. However, his balance sheet shows that he holds A $ 35.5 million in cash, so he actually has net cash of A $ 29.7 million.
How strong is AWN Holdings’ balance sheet?
According to the latest published balance sheet, AWN Holdings had liabilities of A $ 45.9 million due within 12 months and liabilities of A $ 15.1 million due beyond 12 months. On the other hand, he had A $ 35.5 million in cash and A $ 20.9 million in receivables due within a year. It therefore has liabilities totaling AU $ 4.59 million more than its cash and short-term receivables combined.
Given that the listed shares of AWN Holdings are worth a total of A $ 33.3 million, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. Despite its notable liabilities, AWN Holdings has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt load! When analyzing debt levels, the balance sheet is the obvious starting point. But it is the earnings of AWN Holdings that will influence balance sheet performance in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Over the past year, AWN Holdings has recorded a loss before interest and taxes and has actually reduced revenue by 18%, to A $ 107 million. This is not what we hope to see.
So how risky is AWN Holdings?
We are convinced that loss-making companies are, in general, riskier than profitable companies. And the point is that over the past twelve months, AWN Holdings has lost money in earnings before interest and taxes (EBIT). And during the same period, it recorded negative AUS $ 8.7 million free cash outflow and a book loss of A $ 8.1 million. But the saving grace is the A $ 29.7 million on the balance sheet. This jackpot means the business can continue to spend on growth for at least two years, at current rates. Overall, we would say the stock is a bit risky, and we’re generally very cautious until we see positive free cash flow. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example – AWN Holdings has 1 warning sign we think you should be aware.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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