Alithya Group (TSE:ALYA) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Alithya Group Inc. (TSE:ALYA) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

See 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 Alithya Group had debt of CA$123.0m at the end of December 2023, a reduction from CA$129.8m over a year. However, because it has a cash reserve of CA$10.8m, its net debt is less, at about CA$112.2m.

How Strong Is Alithya Group's Balance Sheet?

The latest balance sheet data shows that Alithya Group had liabilities of CA$113.5m due within a year, and liabilities of CA$132.7m falling due after that. On the other hand, it had cash of CA$10.8m and CA$115.2m worth of receivables due within a year. So it has liabilities totalling CA$120.2m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$184.4m, so it does suggest shareholders should keep an eye on Alithya Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. 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 hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Alithya Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$10.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CA$39m. So in short it's a really risky stock. For riskier companies like Alithya Group I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.