Here's Why TESSCO Technologies (NASDAQ:TESS) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 TESSCO Technologies Incorporated (NASDAQ:TESS) 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 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for TESSCO Technologies

What Is TESSCO Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that TESSCO Technologies had US$26.0m of debt in December 2020, down from US$29.4m, one year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is TESSCO Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TESSCO Technologies had liabilities of US$79.7m due within 12 months and liabilities of US$36.4m due beyond that. Offsetting this, it had US$234.2k in cash and US$77.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$38.0m.

While this might seem like a lot, it is not so bad since TESSCO Technologies has a market capitalization of US$66.8m, 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. 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 TESSCO Technologies'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.

In the last year TESSCO Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to US$522m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months TESSCO Technologies produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$23m. 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$5.5m 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. Be aware that TESSCO Technologies is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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