U.S. Markets close in 1 hr 3 mins

Is ADOMANI (NASDAQ:ADOM) Using Too Much Debt?

Simply Wall St

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies ADOMANI, Inc. (NASDAQ:ADOM) makes use of debt. But the more important question is: how much risk is that debt creating?

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, 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.

Check out our latest analysis for ADOMANI

How Much Debt Does ADOMANI Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2019 ADOMANI had US$2.50m of debt, an increase on none, over one year. However, it does have US$7.71m in cash offsetting this, leading to net cash of US$5.21m.

NasdaqCM:ADOM Historical Debt, July 26th 2019

How Strong Is ADOMANI's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ADOMANI had liabilities of US$3.60m due within 12 months and liabilities of US$201.0k due beyond that. Offsetting these obligations, it had cash of US$7.71m as well as receivables valued at US$683.0k due within 12 months. So it can boast US$4.60m more liquid assets than total liabilities.

This excess liquidity suggests that ADOMANI is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, ADOMANI boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ADOMANI 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, ADOMANI reported revenue of US$5.0m, which is a gain of 459%. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is ADOMANI?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year ADOMANI had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$3.4m of cash and made a loss of US$8.4m. However, it has net cash of US$7.7m, so it has a bit of time before it will need more capital. Importantly, ADOMANI's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. For riskier companies like ADOMANI I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.