Alithya Group (TSE:ALYA) Is Carrying A Fair Bit Of Debt

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.' 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. We can see that Alithya Group Inc. (TSE:ALYA) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Alithya Group

What Is Alithya Group's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Alithya Group had debt of CA$54.7m, up from CA$45.0m in one year. However, it does have CA$9.43m in cash offsetting this, leading to net debt of about CA$45.3m.

How Healthy Is Alithya Group's Balance Sheet?

The latest balance sheet data shows that Alithya Group had liabilities of CA$57.9m due within a year, and liabilities of CA$73.1m falling due after that. Offsetting these obligations, it had cash of CA$9.43m as well as receivables valued at CA$77.0m due within 12 months. So its liabilities total CA$44.6m more than the combination of its cash and short-term receivables.

Since publicly traded Alithya Group shares are worth a total of CA$249.1m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Alithya Group'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.

In the last year Alithya Group's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Alithya Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$17m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$4.8m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Alithya Group has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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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