Here's Why Addvalue Technologies (SGX:A31) Can Afford Some Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Addvalue Technologies Ltd (SGX:A31) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

Check out 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$4.05m of debt in March 2023, down from US$5.81m, one year before. However, it also had US$330.0k in cash, and so its net debt is US$3.72m.

How Healthy Is Addvalue Technologies' Balance Sheet?

We can see from the most recent balance sheet that Addvalue Technologies had liabilities of US$5.60m falling due within a year, and liabilities of US$4.92m due beyond that. Offsetting these obligations, it had cash of US$330.0k as well as receivables valued at US$2.33m due within 12 months. So it has liabilities totalling US$7.86m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Addvalue Technologies has a market capitalization of US$24.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Addvalue Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 38%, to US$7.5m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Addvalue Technologies still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$2.5m. 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 US$4.0m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Addvalue Technologies you should be aware of, and 1 of them makes us a bit uncomfortable.

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.