Health Check: How Prudently Does American Realty Investors (NYSE:ARL) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, American Realty Investors, Inc. (NYSE:ARL) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for American Realty Investors

What Is American Realty Investors's Debt?

You can click the graphic below for the historical numbers, but it shows that American Realty Investors had US$414.9m of debt in June 2021, down from US$481.5m, one year before. However, it does have US$46.0m in cash offsetting this, leading to net debt of about US$368.9m.

How Strong Is American Realty Investors' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that American Realty Investors had liabilities of US$103.5m due within 12 months and liabilities of US$384.8m due beyond that. Offsetting this, it had US$46.0m in cash and US$105.9m in receivables that were due within 12 months. So its liabilities total US$336.3m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$171.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, American Realty Investors would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since American Realty Investors 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 American Realty Investors wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to US$63m. 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 American Realty Investors produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$1.6m. 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. It's fair to say the loss of US$870k didn't encourage us either; we'd like to see a profit. 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. For example, we've discovered 2 warning signs for American Realty Investors (1 is potentially serious!) that you should be aware of before investing here.

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.
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