Is Alithya Group (TSE:ALYA) Using Too Much 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?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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?

You can click the graphic below for the historical numbers, but it shows that Alithya Group had CA$127.1m of debt in June 2023, down from CA$142.9m, one year before. However, it does have CA$27.1m in cash offsetting this, leading to net debt of about CA$99.9m.

A Look At Alithya Group's Liabilities

We can see from the most recent balance sheet that Alithya Group had liabilities of CA$201.3m falling due within a year, and liabilities of CA$64.5m due beyond that. Offsetting this, it had CA$27.1m in cash and CA$113.9m in receivables that were due within 12 months. So its liabilities total CA$124.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Alithya Group has a market capitalization of CA$223.3m, 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 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to CA$528m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Alithya Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$11m 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. We would feel better if it turned its trailing twelve month loss of CA$33m into a profit. In the meantime, we consider the stock very risky. 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.