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

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.' 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 note that Aristocrat Leisure Limited (ASX:ALL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Aristocrat Leisure's Debt?

You can click the graphic below for the historical numbers, but it shows that Aristocrat Leisure had AU$1.86b of debt in March 2025, down from AU$2.26b, one year before. However, it does have AU$1.45b in cash offsetting this, leading to net debt of about AU$408.9m.

How Healthy Is Aristocrat Leisure's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aristocrat Leisure had liabilities of AU$1.69b due within 12 months and liabilities of AU$2.20b due beyond that. On the other hand, it had cash of AU$1.45b and AU$1.32b worth of receivables due within a year. So it has liabilities totalling AU$1.12b more than its cash and near-term receivables, combined.

Of course, Aristocrat Leisure has a titanic market capitalization of AU$39.3b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Aristocrat Leisure has virtually no net debt, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Aristocrat Leisure

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Aristocrat Leisure's net debt is only 0.17 times its EBITDA. And its EBIT easily covers its interest expense, being 19.6 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also good is that Aristocrat Leisure grew its EBIT at 12% over the last year, further increasing its ability to manage debt. 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 Aristocrat Leisure'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Aristocrat Leisure produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Happily, Aristocrat Leisure's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its net debt to EBITDA also supports that impression! Looking at the bigger picture, we think Aristocrat Leisure's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. Another factor that would give us confidence in Aristocrat Leisure would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.