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The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We can see that Alteryx, Inc. (NYSE:AYX) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Alteryx’s Debt?
As you can see below, at the end of March 2019, Alteryx had US$176.3m of debt, up from none a year ago. Click the image for more detail. But it also has US$367.1m in cash to offset that, meaning it has US$190.8m net cash.
How Healthy Is Alteryx’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Alteryx had liabilities of US$290.1m due within 12 months and liabilities of US$28.2m due beyond that. Offsetting this, it had US$367.1m in cash and US$64.6m in receivables that were due within 12 months. So it actually has US$113.4m more liquid assets than total liabilities.
Having regard to Alteryx’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the US$7.34b company is short on cash, but still worth keeping an eye on the balance sheet. Given that Alteryx has more cash than debt, we’re pretty confident it can manage its debt safely.
Notably, Alteryx made a loss at the EBIT level, last year, but improved that to positive EBIT of US$23m in the last twelve months. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Alteryx 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Alteryx may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Alteryx generated free cash flow amounting to a very robust 99% of its EBIT, more than we’d expect. That positions it well to pay down debt if desirable to do so.
While we empathize with investors who find debt concerning, you should keep in mind that Alteryx has net cash of US$191m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$23m, being 99% of its EBIT. So we don’t have any problem with Alteryx’s use of debt. Of course, we wouldn’t say no to the extra confidence that we’d gain if we knew that Alteryx insiders have been buying shares: if you’re on the same wavelength, you can find out if insiders are buying by clicking this link.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.