Is TESSCO Technologies (NASDAQ:TESS) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 TESSCO Technologies Incorporated (NASDAQ:TESS) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for TESSCO Technologies

What Is TESSCO Technologies's Debt?

The image below, which you can click on for greater detail, shows that TESSCO Technologies had debt of US$32.1m at the end of September 2020, a reduction from US$35.3m over a year. Net debt is about the same, since the it doesn't have much cash.

A Look At TESSCO Technologies's Liabilities

Zooming in on the latest balance sheet data, we can see that TESSCO Technologies had liabilities of US$108.9m due within 12 months and liabilities of US$11.1m due beyond that. Offsetting these obligations, it had cash of US$19.4k as well as receivables valued at US$74.7m due within 12 months. So its liabilities total US$45.3m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$54.9m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, TESSCO Technologies made a loss at the EBIT level, and saw its revenue drop to US$507m, which is a fall of 11%. We would much prefer see growth.

Caveat Emptor

While TESSCO Technologies's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$19m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of US$24m. In the meantime, 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. For instance, we've identified 3 warning signs for TESSCO Technologies that you should be aware of.

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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This article by Simply Wall St is general in nature. 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.
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