Is ADTRAN Holdings (NASDAQ:ADTN) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 ADTRAN Holdings, Inc. (NASDAQ:ADTN) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for ADTRAN Holdings

What Is ADTRAN Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that ADTRAN Holdings had US$189.8m of debt in September 2024, down from US$210.6m, one year before. However, it does have US$88.5m in cash offsetting this, leading to net debt of about US$101.4m.

A Look At ADTRAN Holdings' Liabilities

According to the last reported balance sheet, ADTRAN Holdings had liabilities of US$304.8m due within 12 months, and liabilities of US$332.6m due beyond 12 months. On the other hand, it had cash of US$88.5m and US$196.7m worth of receivables due within a year. So its liabilities total US$352.3m more than the combination of its cash and short-term receivables.

ADTRAN Holdings has a market capitalization of US$856.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay 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 ADTRAN Holdings'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.

In the last year ADTRAN Holdings had a loss before interest and tax, and actually shrunk its revenue by 29%, to US$905m. To be frank that doesn't bode well.

Caveat Emptor

While ADTRAN Holdings'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$112m. 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. We would feel better if it turned its trailing twelve month loss of US$513m into a profit. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - ADTRAN Holdings has 1 warning sign we think you should be aware of.

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.