Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, ATW Tech Inc. (CVE:ATW) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for ATW Tech
How Much Debt Does ATW Tech Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 ATW Tech had CA$2.59m of debt, an increase on CA$1.26m, over one year. However, because it has a cash reserve of CA$83.4k, its net debt is less, at about CA$2.51m.
How Healthy Is ATW Tech's Balance Sheet?
The latest balance sheet data shows that ATW Tech had liabilities of CA$3.69m due within a year, and liabilities of CA$83.7k falling due after that. Offsetting these obligations, it had cash of CA$83.4k as well as receivables valued at CA$655.3k due within 12 months. So it has liabilities totalling CA$3.03m more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of CA$4.79m, so it does suggest shareholders should keep an eye on ATW Tech's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is ATW Tech'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.
In the last year ATW Tech had a loss before interest and tax, and actually shrunk its revenue by 39%, to CA$1.1m. To be frank that doesn't bode well.
Caveat Emptor
Not only did ATW Tech's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$2.0m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$2.2m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 6 warning signs for ATW Tech you should be aware of, and 5 of them are potentially serious.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
About TSXV:ATW
Overvalued with worrying balance sheet.
