Alto Ingredients (NASDAQ:ALTO) Is Making Moderate Use Of 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Alto Ingredients, Inc. (NASDAQ:ALTO) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Alto Ingredients

How Much Debt Does Alto Ingredients Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Alto Ingredients had debt of US$83.3m, up from US$75.9m in one year. However, because it has a cash reserve of US$33.6m, its net debt is less, at about US$49.8m.

How Strong Is Alto Ingredients' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Alto Ingredients had liabilities of US$45.1m due within 12 months and liabilities of US$108.4m due beyond that. Offsetting these obligations, it had cash of US$33.6m as well as receivables valued at US$52.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$67.9m.

This is a mountain of leverage relative to its market capitalization of US$99.6m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Alto Ingredients made a loss at the EBIT level, and saw its revenue drop to US$1.0b, which is a fall of 22%. That makes us nervous, to say the least.

Caveat Emptor

While Alto Ingredients's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$24m 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$37m. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Alto Ingredients has 2 warning signs we think you should be aware of.

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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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.