Is American Realty Investors (NYSE:ARL) Weighed On By Its Debt Load?

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. Importantly, American Realty Investors, Inc. (NYSE:ARL) does carry debt. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for American Realty Investors

How Much Debt Does American Realty Investors Carry?

You can click the graphic below for the historical numbers, but it shows that American Realty Investors had US$369.2m of debt in September 2021, down from US$452.1m, one year before. On the flip side, it has US$63.9m in cash leading to net debt of about US$305.3m.

How Strong Is American Realty Investors' Balance Sheet?

The latest balance sheet data shows that American Realty Investors had liabilities of US$92.2m due within a year, and liabilities of US$335.4m falling due after that. Offsetting these obligations, it had cash of US$63.9m as well as receivables valued at US$103.4m due within 12 months. So its liabilities total US$260.4m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's US$208.2m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is American Realty Investors's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year American Realty Investors wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to US$64m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though American Realty Investors managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost US$1.3m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. But on the bright side the company actually produced a statutory profit of US$11m and free cash flow of US$13m. So one might argue that there's still a chance it can get things on the right track. 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. We've identified 2 warning signs with American Realty Investors (at least 1 which is a bit concerning) , 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.