Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Alpha HPA Limited (ASX:A4N) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Alpha HPA
What Is Alpha HPA's Debt?
As you can see below, at the end of December 2023, Alpha HPA had AU$3.00m of debt, up from none a year ago. Click the image for more detail. However, it does have AU$36.1m in cash offsetting this, leading to net cash of AU$33.1m.
A Look At Alpha HPA's Liabilities
According to the last reported balance sheet, Alpha HPA had liabilities of AU$7.02m due within 12 months, and liabilities of AU$3.92m due beyond 12 months. On the other hand, it had cash of AU$36.1m and AU$8.22m worth of receivables due within a year. So it can boast AU$33.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Alpha HPA could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Alpha HPA boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.
It seems likely shareholders hope that Alpha HPA can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.
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 the fact is that over the last twelve months Alpha HPA lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$45m and booked a AU$20m accounting loss. Given it only has net cash of AU$33.1m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 3 warning signs for Alpha HPA you should be aware of, and 2 of them are significant.
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.
About ASX:A4N
High growth potential with excellent balance sheet.
