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. As with many other companies Avient Corporation (NYSE:AVNT) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Avient
What Is Avient’s Net Debt?
The image below, which you can click on for greater detail, shows that at June 2020 Avient had debt of US$1.88b, up from US$1.42b in one year. However, it does have US$1.98b in cash offsetting this, leading to net cash of US$99.9m.
How Strong Is Avient’s Balance Sheet?
We can see from the most recent balance sheet that Avient had liabilities of US$624.3m falling due within a year, and liabilities of US$2.16b due beyond that. Offsetting these obligations, it had cash of US$1.98b as well as receivables valued at US$310.6m due within 12 months. So its liabilities total US$497.7m more than the combination of its cash and short-term receivables.
Of course, Avient has a market capitalization of US$2.63b, so these liabilities are probably manageable. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Avient also has more cash than debt, so we’re pretty confident it can manage its debt safely.
Also relevant is that Avient has grown its EBIT by a very respectable 22% in the last year, thus enhancing its ability to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Avient 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. While Avient 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 last three years, Avient recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we’d usually expect. That puts it in a very strong position to pay down debt.
While Avient does have more liabilities than liquid assets, it also has net cash of US$99.9m. And it impressed us with free cash flow of US$201m, being 87% of its EBIT. So is Avient’s debt a risk? It doesn’t seem so to us. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we’ve spotted 3 warning signs for Avient (of which 1 doesn’t sit too well with us!) you should know about.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
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. 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.
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