Is Allied Motion Technologies (NASDAQ:AMOT) A Risky Investment?

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.' 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 note that Allied Motion Technologies Inc. (NASDAQ:AMOT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Allied Motion Technologies

What Is Allied Motion Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Allied Motion Technologies had US$169.3m of debt, an increase on US$120.8m, over one year. However, it does have US$16.9m in cash offsetting this, leading to net debt of about US$152.4m.

How Healthy Is Allied Motion Technologies' Balance Sheet?

According to the last reported balance sheet, Allied Motion Technologies had liabilities of US$78.8m due within 12 months, and liabilities of US$222.0m due beyond 12 months. On the other hand, it had cash of US$16.9m and US$68.6m worth of receivables due within a year. So its liabilities total US$215.3m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Allied Motion Technologies has a market capitalization of US$380.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

With net debt to EBITDA of 3.4 Allied Motion Technologies has a fairly noticeable amount of debt. But the high interest coverage of 7.3 suggests it can easily service that debt. Allied Motion Technologies grew its EBIT by 4.9% in the last year. That's far from incredible but it is a good thing, when it comes to paying off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Allied Motion Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Allied Motion Technologies's free cash flow amounted to 46% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Both Allied Motion Technologies's net debt to EBITDA and its level of total liabilities were discouraging. But its not so bad at covering its interest expense with its EBIT. Looking at all the angles mentioned above, it does seem to us that Allied Motion Technologies is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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. For example Allied Motion Technologies has 4 warning signs (and 1 which can't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.