We Think Addvalue Technologies (SGX:A31) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Addvalue Technologies Ltd (SGX:A31) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. 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 Addvalue Technologies

How Much Debt Does Addvalue Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Addvalue Technologies had US$6.73m of debt, an increase on US$5.09m, over one year. On the flip side, it has US$290.0k in cash leading to net debt of about US$6.44m.

How Healthy Is Addvalue Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Addvalue Technologies had liabilities of US$10.2m due within 12 months and liabilities of US$1.67m due beyond that. On the other hand, it had cash of US$290.0k and US$7.08m worth of receivables due within a year. So its liabilities total US$4.50m more than the combination of its cash and short-term receivables.

Since publicly traded Addvalue Technologies shares are worth a total of US$35.7m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Addvalue Technologies made a loss at the EBIT level, and saw its revenue drop to US$2.7m, which is a fall of 72%. To be frank that doesn't bode well.

Caveat Emptor

While Addvalue Technologies's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$2.4m 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. 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 US$4.6m in negative free cash flow over the last twelve months. 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. We've identified 4 warning signs with Addvalue Technologies (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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