Aristocrat Leisure (ASX:ALL) Has A Rock Solid Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Aristocrat Leisure Limited (ASX:ALL) does have debt on its balance sheet. 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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

What Is Aristocrat Leisure's Debt?

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. But on the other hand it also has AU$2.66b in cash, leading to a AU$396.2m net cash position.

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 these obligations, it had cash of AU$2.66b as well as receivables valued at AU$1.20b 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 while it's hard to imagine that the AU$29.8b company is struggling for cash, we still think it's worth monitoring its 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 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. During the last three years, Aristocrat Leisure produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. 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. And it impressed us with free cash flow of AU$1.3b, being 77% of its EBIT. So is Aristocrat Leisure's debt a risk? It doesn't seem so to us. 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.