Addvalue Technologies (SGX:A31) Is Carrying A Fair Bit Of Debt

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 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. We can see that Addvalue Technologies Ltd (SGX:A31) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Addvalue Technologies

What Is Addvalue Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Addvalue Technologies had US$5.61m of debt in March 2022, down from US$6.73m, one year before. On the flip side, it has US$900.0k in cash leading to net debt of about US$4.71m.

How Strong Is Addvalue Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Addvalue Technologies had liabilities of US$11.0m due within 12 months and liabilities of US$1.63m due beyond that. Offsetting these obligations, it had cash of US$900.0k as well as receivables valued at US$7.70m due within 12 months. So it has liabilities totalling US$4.07m more than its cash and near-term receivables, combined.

Given Addvalue Technologies has a market capitalization of US$35.9m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Addvalue Technologies 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 Addvalue Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 105%, to US$5.5m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

While we can certainly appreciate Addvalue Technologies's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at US$877k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$1.3m of cash over the last year. So suffice it to say we do consider the stock to be 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. To that end, you should learn about the 4 warning signs we've spotted with Addvalue Technologies (including 1 which is concerning) .

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.