Is Addvalue Technologies (SGX:A31) Using Too Much Debt?
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Addvalue Technologies Ltd (SGX:A31) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
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What Is Addvalue Technologies's Debt?
The image below, which you can click on for greater detail, shows that Addvalue Technologies had debt of US$2.54m at the end of September 2022, a reduction from US$6.57m over a year. However, because it has a cash reserve of US$1.35m, its net debt is less, at about US$1.20m.
How Strong Is Addvalue Technologies' Balance Sheet?
The latest balance sheet data shows that Addvalue Technologies had liabilities of US$6.00m due within a year, and liabilities of US$1.70m falling due after that. On the other hand, it had cash of US$1.35m and US$725.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$5.62m.
This deficit isn't so bad because Addvalue Technologies is worth US$26.5m, and thus could probably raise enough capital to shore up 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 it is Addvalue Technologies's earnings that will influence how the balance sheet holds up in the future. 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 76%, to US$6.3m. With any luck the company will be able to grow its way to profitability.
Even though Addvalue Technologies managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable US$6.4m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$5.3m of cash over the last year. So in short it's a really risky stock. 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. For example Addvalue Technologies has 4 warning signs (and 2 which make us uncomfortable) we think you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
Addvalue Technologies Ltd, an investment holding company, provides satellite-based communication and digital broadband products and solutions.
Mediocre balance sheet with weak fundamentals.