Does ALT5 Sigma (NASDAQ:ALTS) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 ALT5 Sigma Corporation (NASDAQ:ALTS) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ALT5 Sigma

How Much Debt Does ALT5 Sigma Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 ALT5 Sigma had US$9.84m of debt, an increase on none, over one year. However, it also had US$8.67m in cash, and so its net debt is US$1.17m.

How Strong Is ALT5 Sigma's Balance Sheet?

We can see from the most recent balance sheet that ALT5 Sigma had liabilities of US$42.3m falling due within a year, and liabilities of US$8.48m due beyond that. On the other hand, it had cash of US$8.67m and US$903.0k worth of receivables due within a year. So its liabilities total US$41.2m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$31.3m, we think shareholders really should watch ALT5 Sigma's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since ALT5 Sigma will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year ALT5 Sigma had a loss before interest and tax, and actually shrunk its revenue by 82%, to US$7.1m. That makes us nervous, to say the least.

Caveat Emptor

While ALT5 Sigma's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$7.8m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of US$19m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for ALT5 Sigma you should be aware of, and 3 of them make us uncomfortable.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.