Here's Why Addvalue Technologies (SGX:A31) Can Afford Some 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. Importantly, Addvalue Technologies Ltd (SGX:A31) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Addvalue Technologies
What Is Addvalue Technologies's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Addvalue Technologies had US$5.46m of debt, an increase on US$2.59m, over one year. And it doesn't have much cash, so its net debt is about the same.
A Look At Addvalue Technologies's Liabilities
The latest balance sheet data shows that Addvalue Technologies had liabilities of US$10.2m due within a year, and liabilities of US$1.65m falling due after that. On the other hand, it had cash of US$54.0k and US$4.18m worth of receivables due within a year. So it has liabilities totalling US$7.61m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Addvalue Technologies is worth US$28.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Addvalue Technologies will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Addvalue Technologies had negative earnings before interest and tax, and actually shrunk its revenue by 11%, to US$3.9m. We would much prefer see growth.
Caveat Emptor
Not only did Addvalue Technologies'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$2.2m. 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. However, it doesn't help that it burned through US$2.8m of cash over the last year. So suffice it to say we consider the stock very risky. For riskier companies like Addvalue Technologies I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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