Is Aristocrat Leisure (ASX:ALL) 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 can see that Aristocrat Leisure Limited (ASX:ALL) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Aristocrat Leisure

How Much Debt Does Aristocrat Leisure Carry?

You can click the graphic below for the historical numbers, but it shows that Aristocrat Leisure had AU$2.46b of debt in September 2022, down from AU$3.27b, one year before. But it also has AU$3.04b in cash to offset that, meaning it has AU$587.4m net cash.

A Look At Aristocrat Leisure's Liabilities

According to the last reported balance sheet, Aristocrat Leisure had liabilities of AU$1.32b due within 12 months, and liabilities of AU$2.78b due beyond 12 months. Offsetting these obligations, it had cash of AU$3.04b as well as receivables valued at AU$886.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$166.8m.

This state of affairs indicates that Aristocrat Leisure's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the AU$20.5b 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!

On top of that, Aristocrat Leisure grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 94% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Aristocrat Leisure has AU$587.4m in net cash. And it impressed us with free cash flow of AU$977m, being 94% of its EBIT. So is Aristocrat Leisure's debt a risk? It doesn't seem so to us. 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, 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.