Is Advantage Solutions (NASDAQ:ADV) Weighed On By Its Debt Load?

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.' 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. We can see that Advantage Solutions Inc. (NASDAQ:ADV) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Advantage Solutions

How Much Debt Does Advantage Solutions Carry?

As you can see below, Advantage Solutions had US$1.70b of debt at December 2024, down from US$1.87b a year prior. However, it also had US$205.2m in cash, and so its net debt is US$1.49b.

How Strong Is Advantage Solutions' Balance Sheet?

The latest balance sheet data shows that Advantage Solutions had liabilities of US$460.1m due within a year, and liabilities of US$1.90b falling due after that. On the other hand, it had cash of US$205.2m and US$603.1m worth of receivables due within a year. So its liabilities total US$1.55b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$757.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Advantage Solutions would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Advantage Solutions's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Advantage Solutions made a loss at the EBIT level, and saw its revenue drop to US$3.6b, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

Not only did Advantage Solutions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$22m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of US$381m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. For riskier companies like Advantage Solutions I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.