Does Adverty (NGM:ADVT) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Adverty AB (publ) (NGM:ADVT) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Adverty

What Is Adverty's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Adverty had debt of kr23.3m, up from kr16.3m in one year. However, because it has a cash reserve of kr1.42m, its net debt is less, at about kr21.9m.

How Healthy Is Adverty's Balance Sheet?

According to the last reported balance sheet, Adverty had liabilities of kr36.3m due within 12 months, and liabilities of kr23.3m due beyond 12 months. Offsetting these obligations, it had cash of kr1.42m as well as receivables valued at kr48.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr10.1m.

Adverty has a market capitalization of kr27.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Adverty will need earnings to service that debt. 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 Adverty wasn't profitable at an EBIT level, but managed to grow its revenue by 88%, to kr66m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Adverty still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr1.9m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled kr8.8m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. We've identified 4 warning signs with Adverty , and understanding them should be part of your investment process.

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.

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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.