David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Alithya Group Inc. (TSE:ALYA) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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 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 examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Alithya Group Carry?
The image below, which you can click on for greater detail, shows that at June 2021 Alithya Group had debt of CA$62.4m, up from CA$51.8m in one year. However, it also had CA$10.7m in cash, and so its net debt is CA$51.7m.
A Look At Alithya Group's Liabilities
Zooming in on the latest balance sheet data, we can see that Alithya Group had liabilities of CA$140.8m due within 12 months and liabilities of CA$38.0m due beyond that. On the other hand, it had cash of CA$10.7m and CA$105.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$62.5m.
While this might seem like a lot, it is not so bad since Alithya Group has a market capitalization of CA$291.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Alithya Group 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.
Over 12 months, Alithya Group reported revenue of CA$320m, which is a gain of 15%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
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$10m. 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 CA$9.3m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Alithya Group is showing 3 warning signs in our investment analysis , you should know about...
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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