We Think Aristocrat Leisure (ASX:ALL) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Aristocrat Leisure Limited (ASX:ALL) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Aristocrat Leisure

What Is Aristocrat Leisure's Debt?

You can click the graphic below for the historical numbers, but it shows that Aristocrat Leisure had AU$2.34b of debt in September 2023, down from AU$2.46b, one year before. However, it does have AU$3.19b in cash offsetting this, leading to net cash of AU$844.9m.

A Look At Aristocrat Leisure's Liabilities

According to the last reported balance sheet, Aristocrat Leisure had liabilities of AU$1.53b due within 12 months, and liabilities of AU$2.67b due beyond 12 months. Offsetting this, it had AU$3.19b in cash and AU$1.05b 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 while it's hard to imagine that the AU$28.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Aristocrat Leisure has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Aristocrat Leisure recorded free cash flow worth a fulsome 81% 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

While it is always sensible to investigate a company's debt, in this case Aristocrat Leisure has AU$844.9m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 81% 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. 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.