Wireless Telecom Group (NYSEMKT:WTT) Is Carrying A Fair Bit Of Debt

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 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. Importantly, Wireless Telecom Group, Inc. (NYSEMKT:WTT) does carry 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Wireless Telecom Group

What Is Wireless Telecom Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Wireless Telecom Group had US$9.37m of debt, an increase on US$2.98m, over one year. However, it does have US$2.20m in cash offsetting this, leading to net debt of about US$7.17m.

A Look At Wireless Telecom Group's Liabilities

We can see from the most recent balance sheet that Wireless Telecom Group had liabilities of US$11.2m falling due within a year, and liabilities of US$11.2m due beyond that. Offsetting these obligations, it had cash of US$2.20m as well as receivables valued at US$8.04m due within 12 months. So its liabilities total US$12.1m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Wireless Telecom Group has a market capitalization of US$38.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wireless Telecom Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Wireless Telecom Group made a loss at the EBIT level, and saw its revenue drop to US$43m, which is a fall of 13%. We would much prefer see growth.

Caveat Emptor

Not only did Wireless Telecom Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$2.1m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$2.4m into a profit. So we do think this stock is quite 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, we've discovered 2 warning signs for Wireless Telecom Group that you should be aware of before investing here.

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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