Is ADDvantage Technologies Group (NASDAQ:AEY) Using Debt Sensibly?

NASDAQ:AEY) does carry debt. But the more important question is: how much risk is that debt creating?” data-reactid=”28″>David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ 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. Importantly, ADDvantage Technologies Group, Inc. (NASDAQ:AEY) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first look at cash and debt together.

See our latest analysis for ADDvantage Technologies Group ” data-reactid=”31″>See our latest analysis for ADDvantage Technologies Group

What Is ADDvantage Technologies Group’s Debt?

As you can see below, at the end of June 2020, ADDvantage Technologies Group had US$7.55m of debt, up from US$750.0k a year ago. Click the image for more detail. However, it does have US$10.4m in cash offsetting this, leading to net cash of US$2.81m.

A Look At ADDvantage Technologies Group’s Liabilities

The latest balance sheet data shows that ADDvantage Technologies Group had liabilities of US$13.4m due within a year, and liabilities of US$6.85m falling due after that. On the other hand, it had cash of US$10.4m and US$5.28m worth of receivables due within a year. So it has liabilities totalling US$4.6m more than its cash and near-term receivables, combined.

this graph of its long term earnings trend.” data-reactid=”52″>Since publicly traded ADDvantage Technologies Group shares are worth a total of US$25.8m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, ADDvantage Technologies Group also has more cash than debt, so we’re pretty confident it can manage its debt safely. 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 ADDvantage Technologies Group will need earnings to service that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, ADDvantage Technologies Group reported revenue of US$56m, which is a gain of 28%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is ADDvantage Technologies Group?

We’ve identified 5 warning signs with ADDvantage Technologies Group (at least 1 which doesn’t sit too well with us) , and understanding them should be part of your investment process.” data-reactid=”55″>We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that ADDvantage Technologies Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$3.2m and booked a US$17.9m accounting loss. With only US$2.81m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, ADDvantage Technologies Group may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We’ve identified 5 warning signs with ADDvantage Technologies Group (at least 1 which doesn’t sit too well with us) , and understanding them should be part of your investment process.