TESSCO Technologies (NASDAQ:TESS) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, '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. We note that TESSCO Technologies Incorporated (NASDAQ:TESS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 TESSCO Technologies

How Much Debt Does TESSCO Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 TESSCO Technologies had US$45.7m of debt, an increase on US$32.1m, over one year. However, because it has a cash reserve of US$2.05m, its net debt is less, at about US$43.6m.

How Healthy Is TESSCO Technologies' Balance Sheet?

We can see from the most recent balance sheet that TESSCO Technologies had liabilities of US$72.1m falling due within a year, and liabilities of US$54.2m due beyond that. Offsetting these obligations, it had cash of US$2.05m as well as receivables valued at US$83.4m due within 12 months. So it has liabilities totalling US$40.8m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$54.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if TESSCO Technologies can strengthen its balance sheet over time. 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 reported revenue of US$401m, which is a gain of 2.5%, although it did not report any earnings before interest and tax. 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. Indeed, it lost a very considerable US$12m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$20m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for TESSCO Technologies (1 shouldn't be ignored!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.