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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Aristocrat Leisure Limited (ASX:ALL) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Aristocrat Leisure

How Much Debt Does Aristocrat Leisure Carry?

The chart below, which you can click on for greater detail, shows that Aristocrat Leisure had AU$2.26b in debt in March 2024; about the same as the year before. However, it does have AU$2.66b in cash offsetting this, leading to net cash of AU$396.2m.

How Healthy Is Aristocrat Leisure's Balance Sheet?

The latest balance sheet data shows that Aristocrat Leisure had liabilities of AU$1.34b due within a year, and liabilities of AU$2.57b falling due after that. Offsetting this, it had AU$2.66b in cash and AU$1.20b 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$34.9b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Aristocrat Leisure also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Aristocrat Leisure grew its EBIT by 19% last year, making its debt load easier to handle. 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 Aristocrat Leisure can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 most recent three years, Aristocrat Leisure recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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$396.2m. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in AU$1.3b. So is Aristocrat Leisure's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Aristocrat Leisure .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.