Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies ADDvantage Technologies Group, Inc. (NASDAQ:AEY) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does ADDvantage Technologies Group Carry?
The image below, which you can click on for greater detail, shows that ADDvantage Technologies Group had debt of US$5.72m at the end of June 2021, a reduction from US$7.55m over a year. On the flip side, it has US$3.60m in cash leading to net debt of about US$2.12m.
How Strong Is ADDvantage Technologies Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that ADDvantage Technologies Group had liabilities of US$14.8m due within 12 months and liabilities of US$4.54m due beyond that. Offsetting these obligations, it had cash of US$3.60m as well as receivables valued at US$9.21m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$6.57m.
This deficit isn't so bad because ADDvantage Technologies Group is worth US$22.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is ADDvantage Technologies Group'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.
Over 12 months, ADDvantage Technologies Group made a loss at the EBIT level, and saw its revenue drop to US$55m, which is a fall of 2.0%. We would much prefer see growth.
Caveat Emptor
Over the last twelve months ADDvantage Technologies Group produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$8.1m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$8.5m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example ADDvantage Technologies Group has 5 warning signs (and 2 which are a bit concerning) we think you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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