Is Alpha HPA (ASX:A4N) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Alpha HPA Limited (ASX:A4N) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

See our latest analysis for Alpha HPA

What Is Alpha HPA's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Alpha HPA had debt of AU$3.56m, up from AU$3.00m in one year. But it also has AU$148.9m in cash to offset that, meaning it has AU$145.3m net cash.

How Strong Is Alpha HPA's Balance Sheet?

We can see from the most recent balance sheet that Alpha HPA had liabilities of AU$49.5m falling due within a year, and liabilities of AU$17.3m due beyond that. Offsetting these obligations, it had cash of AU$148.9m as well as receivables valued at AU$16.8m due within 12 months. So it actually has AU$99.0m more liquid assets than total liabilities.

This surplus suggests that Alpha HPA has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Alpha HPA has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Alpha HPA can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Given it has no significant operating revenue at the moment, shareholders will be hoping Alpha HPA can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Alpha HPA?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Alpha HPA had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$76m and booked a AU$32m accounting loss. However, it has net cash of AU$145.3m, so it has a bit of time before it will need more capital. The good news for shareholders is that Alpha HPA has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Alpha HPA (2 are significant) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.