Aristocrat Leisure (ASX:ALL) Could Easily Take On More Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Aristocrat Leisure Limited (ASX:ALL) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

See our latest analysis for Aristocrat Leisure

How Much Debt Does Aristocrat Leisure Carry?

The image below, which you can click on for greater detail, shows that Aristocrat Leisure had debt of AU$2.30b at the end of March 2023, a reduction from AU$2.47b over a year. However, it does have AU$2.77b in cash offsetting this, leading to net cash of AU$466.4m.

How Strong Is Aristocrat Leisure's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aristocrat Leisure had liabilities of AU$1.26b due within 12 months and liabilities of AU$2.60b due beyond that. Offsetting this, it had AU$2.77b in cash and AU$1.09b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Aristocrat Leisure's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the AU$26.3b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Aristocrat Leisure boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Aristocrat Leisure grew its EBIT at 16% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aristocrat Leisure's ability to maintain a healthy balance sheet going forward. 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. Aristocrat Leisure 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. Over the last three years, Aristocrat Leisure recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Aristocrat Leisure's liabilities, but we can be reassured by the fact it has has net cash of AU$466.4m. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in AU$1.0b. So we don't think Aristocrat Leisure's use of debt is risky. We'd be very excited to see if Aristocrat Leisure insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.