Is Avinger (NASDAQ: AVGR) a risky investment?
Legendary fund manager Li Lu (who Charlie Munger supported) once said, âThe biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Avinger, Inc. (NASDAQ: AVGR) uses debt in its business. But does this debt worry shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.
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How much debt does Avinger have?
As you can see below, at the end of March 2021, Avinger had $ 13.4 million in debt, down from $ 9.37 million a year ago. Click on the image for more details. But it also has $ 30.4 million in cash to make up for that, which means it has $ 17.1 million in net cash.
A look at Averinger’s responsibilities
According to the latest published balance sheet, Avinger had debt of US $ 7.24 million due within 12 months and debt of US $ 14.4 million due beyond 12 months. In compensation for these obligations, it had cash of US $ 30.4 million as well as receivables valued at US $ 1.53 million due within 12 months. So he actually has $ 10.3 million After liquid assets as total liabilities.
This short-term liquidity is a sign that Avinger could probably pay off its debt easily, as its balance sheet is far from tight. In short, Avinger has a net cash flow, so it’s fair to say that she doesn’t have a lot of debt! There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Averinger’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts‘ earnings forecasts.
Year over year, Avinger recorded a loss in EBIT and saw revenue drop to US $ 9.1 million, a decrease of 5.2%. We would much prefer to see the growth.
So how risky is Avinger?
Statistically speaking, businesses that lose money are riskier than those that earn it. And over the past year, Avinger has recorded a loss of earnings before interest and taxes (EBIT), frankly. And during the same period, it recorded negative free cash outflows of US $ 15 million and a book loss of US $ 22 million. Since it only has a net cash position of US $ 17.1 million, the company may need to raise more capital if it doesn’t break even soon. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce regular free cash flow. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. We have identified 4 warning signs with Avinger (at least 2 which are a little worrisome), and understanding them should be part of your investment process.
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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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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