We Think a2 Milk (NZSE:ATM) Can Manage Its Debt With Ease

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.' 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. We note that The a2 Milk Company Limited (NZSE:ATM) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is a2 Milk's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 a2 Milk had NZ$77.8m of debt, an increase on NZ$37.9m, over one year. But it also has NZ$1.10b in cash to offset that, meaning it has NZ$1.02b net cash.

How Strong Is a2 Milk's Balance Sheet?

The latest balance sheet data shows that a2 Milk had liabilities of NZ$450.1m due within a year, and liabilities of NZ$61.3m falling due after that. Offsetting these obligations, it had cash of NZ$1.10b as well as receivables valued at NZ$92.2m due within 12 months. So it can boast NZ$681.0m more liquid assets than total liabilities.

This short term liquidity is a sign that a2 Milk could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, a2 Milk boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for a2 Milk

Another good sign is that a2 Milk has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if a2 Milk 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While a2 Milk has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, a2 Milk recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that a2 Milk has net cash of NZ$1.02b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NZ$198m, being 82% of its EBIT. So is a2 Milk's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in a2 Milk would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.