Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Addvalue Technologies Ltd (SGX: A31) uses debt in his business. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest review for Addvalue Technologies

What is Addvalue Technologies’ net debt?

You can click on the graph below for historical numbers, but it shows that as of September 2021, Addvalue Technologies had a debt of $ 6.57 million, an increase from $ 5.03 million, on a year. However, he also had $ 262.0,000 in cash, so his net debt is $ 6.31 million.

How strong is Addvalue Technologies’ balance sheet?

We can see from the most recent balance sheet that Addvalue Technologies had liabilities of US $ 12.7 million maturing within one year and liabilities of US $ 1.67 million maturing within one year. of the. In compensation for these obligations, he had cash of US $ 262.0K as well as receivables valued at US $ 7.58M maturing within 12 months. Its liabilities therefore total US $ 6.52 million more than the combination of its cash and short-term receivables.

While that might sound like a lot, it’s not that bad since Addvalue Technologies has a market cap of $ 22.2 million, and therefore could likely strengthen its balance sheet by raising capital if needed. However, it is always worth taking a close look at your ability to repay your debt. When analyzing debt levels, the balance sheet is the obvious place to start. But you can’t look at debt in isolation; since Addvalue Technologies will need revenue to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Over the past year, Addvalue Technologies recorded a loss before interest and taxes and actually reduced revenue by 57% to $ 3.6 million. To be frank, that doesn’t bode well.

Emptor Warning

While Addvalue Technologies’ decline in revenue is about as comforting as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less attractive. To be precise, the EBIT loss amounted to US $ 2.0 million. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. Quite frankly, we think the record is far from up to par, although it could improve over time. However, it doesn’t help that he spent $ 2.8 million in cash in the past year. Suffice it to say, then, that we consider the action to be very risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 4 warning signs for Addvalue Technologies (1 should not be ignored) you should be aware of this.

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.