Would ADDvantage Technologies Group (NASDAQ:AEY) Be Better Off With Less 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 ADDvantage Technologies Group, Inc. (NASDAQ:AEY) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for ADDvantage Technologies Group

What Is ADDvantage Technologies Group's Net Debt?

As you can see below, at the end of December 2020, ADDvantage Technologies Group had US$5.73m of debt, up from US$1.70m a year ago. Click the image for more detail. However, because it has a cash reserve of US$5.40m, its net debt is less, at about US$328.0k.

How Healthy Is ADDvantage Technologies Group's Balance Sheet?

We can see from the most recent balance sheet that ADDvantage Technologies Group had liabilities of US$11.3m falling due within a year, and liabilities of US$4.50m due beyond that. Offsetting these obligations, it had cash of US$5.40m as well as receivables valued at US$7.21m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.19m.

Given ADDvantage Technologies Group has a market capitalization of US$24.4m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, ADDvantage Technologies Group has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But it is ADDvantage Technologies Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, ADDvantage Technologies Group made a loss at the EBIT level, and saw its revenue drop to US$49m, which is a fall of 21%. That makes us nervous, to say the least.

Caveat Emptor

Not only did ADDvantage Technologies Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$9.4m. 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. However, it doesn't help that it burned through US$5.9m of cash over the last year. So in short it's a really risky stock. 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 ADDvantage Technologies Group has 5 warning signs (and 2 which don't sit too well with us) 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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