We Think Alto Ingredients (NASDAQ:ALTO) Has A Fair Chunk Of Debt

Warren Buffett famously said, '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. Importantly, Alto Ingredients, Inc. (NASDAQ:ALTO) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Alto Ingredients

What Is Alto Ingredients's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Alto Ingredients had debt of US$68.4m, up from US$50.4m in one year. However, it also had US$36.5m in cash, and so its net debt is US$31.9m.

How Strong Is Alto Ingredients' Balance Sheet?

We can see from the most recent balance sheet that Alto Ingredients had liabilities of US$78.0m falling due within a year, and liabilities of US$92.2m due beyond that. On the other hand, it had cash of US$36.5m and US$68.7m worth of receivables due within a year. So it has liabilities totalling US$65.1m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$102.9m. 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 Alto Ingredients's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Alto Ingredients reported revenue of US$1.3b, which is a gain of 11%, 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.

Caveat Emptor

Importantly, Alto Ingredients had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$59m. 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. However, it doesn't help that it burned through US$32m of cash over the last year. So suffice it to say we consider the stock very 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. We've identified 1 warning sign with Alto Ingredients , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.