Is Ardent Leisure Group (ASX:ALG) A Risky Investment?

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. We note that Ardent Leisure Group Limited (ASX:ALG) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ardent Leisure Group

How Much Debt Does Ardent Leisure Group Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Ardent Leisure Group had debt of AU$277.6m, up from AU$182.3m in one year. However, because it has a cash reserve of AU$105.4m, its net debt is less, at about AU$172.2m.

How Strong Is Ardent Leisure Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ardent Leisure Group had liabilities of AU$101.7m due within 12 months and liabilities of AU$622.2m due beyond that. Offsetting this, it had AU$105.4m in cash and AU$6.35m in receivables that were due within 12 months. So it has liabilities totalling AU$612.1m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's AU$450.9m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 Ardent Leisure Group 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.

In the last year Ardent Leisure Group had a loss before interest and tax, and actually shrunk its revenue by 47%, to AU$273m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Ardent Leisure Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable AU$98m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of AU$39m over the last twelve months. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Ardent Leisure Group that you should be aware of before investing here.

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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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. 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.
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