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.' 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 ADTRAN Holdings, Inc. (NASDAQ:ADTN) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is ADTRAN Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that ADTRAN Holdings had US$190.3m of debt in June 2024, down from US$210.9m, one year before. However, it does have US$111.2m in cash offsetting this, leading to net debt of about US$79.1m.

A Look At ADTRAN Holdings' Liabilities

According to the last reported balance sheet, ADTRAN Holdings had liabilities of US$289.7m due within 12 months, and liabilities of US$341.1m due beyond 12 months. Offsetting this, it had US$111.2m in cash and US$208.0m in receivables that were due within 12 months. So it has liabilities totalling US$311.7m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$499.9m, so it does suggest shareholders should keep an eye on ADTRAN Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ADTRAN Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, ADTRAN Holdings made a loss at the EBIT level, and saw its revenue drop to US$950m, which is a fall of 30%. To be frank that doesn't bode well.

Caveat Emptor

While ADTRAN Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$130m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$5.3m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with ADTRAN Holdings , and understanding them should be part of your investment process.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.