We Think Addvalue Technologies (SGX:A31) Has A Fair Chunk Of 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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Debt?

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. However, it does have US$290.0k in cash offsetting this, leading to net debt of about US$6.44m.

How Healthy Is Addvalue Technologies' Balance Sheet?

We can see from the most recent balance sheet that Addvalue Technologies had liabilities of US$10.2m falling due within a year, 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 outweigh the sum of its cash and (near-term) receivables by US$4.50m.

While this might seem like a lot, it is not so bad since Addvalue Technologies has a market capitalization of US$20.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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 had a loss before interest and tax, and actually shrunk its revenue by 72%, to US$2.7m. That makes us nervous, to say the least.

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. Its EBIT loss was a whopping US$2.4m. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Addvalue Technologies has 5 warning signs (and 1 which can't be ignored) we think you should know about.

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. 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.
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