Warren Buffett famously said, '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 note that Aviat Networks, Inc. (NASDAQ:AVNW) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Aviat Networks Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2024 Aviat Networks had US$48.9m of debt, an increase on US$6.20m, over one year. However, its balance sheet shows it holds US$59.2m in cash, so it actually has US$10.2m net cash.
How Healthy Is Aviat Networks' Balance Sheet?
The latest balance sheet data shows that Aviat Networks had liabilities of US$171.1m due within a year, and liabilities of US$60.7m falling due after that. Offsetting this, it had US$59.2m in cash and US$213.0m in receivables that were due within 12 months. So it actually has US$40.4m more liquid assets than total liabilities.
This surplus suggests that Aviat Networks has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Aviat Networks boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Aviat Networks's EBIT dived 16%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Aviat Networks can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Aviat Networks may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Aviat Networks recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
While it is always sensible to investigate a company's debt, in this case Aviat Networks has US$10.2m in net cash and a decent-looking balance sheet. So we are not troubled with Aviat Networks's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Aviat Networks you should know about.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.