Allegra Orthopaedics (ASX:AMT) Is Making Moderate Use Of 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. Importantly, Allegra Orthopaedics Limited (ASX:AMT) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Allegra Orthopaedics

What Is Allegra Orthopaedics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Allegra Orthopaedics had AU$2.83m of debt, an increase on AU$1.04m, over one year. On the flip side, it has AU$606.9k in cash leading to net debt of about AU$2.23m.

How Healthy Is Allegra Orthopaedics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Allegra Orthopaedics had liabilities of AU$3.46m due within 12 months and liabilities of AU$577.0k due beyond that. Offsetting these obligations, it had cash of AU$606.9k as well as receivables valued at AU$791.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$2.64m.

Allegra Orthopaedics has a market capitalization of AU$7.31m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Allegra Orthopaedics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Allegra Orthopaedics made a loss at the EBIT level, and saw its revenue drop to AU$3.7m, which is a fall of 31%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Allegra Orthopaedics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable AU$1.9m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$1.3m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Allegra Orthopaedics (at least 4 which are a bit concerning) , and understanding them should be part of your investment process.

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.