Is iLearningEngines (NASDAQ:AILE) Using Too Much 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, iLearningEngines, Inc. (NASDAQ:AILE) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for iLearningEngines

What Is iLearningEngines's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 iLearningEngines had US$109.7m of debt, an increase on US$80.8m, over one year. However, it does have US$39.2m in cash offsetting this, leading to net debt of about US$70.5m.

How Healthy Is iLearningEngines' Balance Sheet?

We can see from the most recent balance sheet that iLearningEngines had liabilities of US$38.5m falling due within a year, and liabilities of US$115.3m due beyond that. Offsetting these obligations, it had cash of US$39.2m as well as receivables valued at US$91.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$23.1m.

Given iLearningEngines has a market capitalization of US$187.8m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if iLearningEngines can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year iLearningEngines wasn't profitable at an EBIT level, but managed to grow its revenue by 34%, to US$486m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though iLearningEngines managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping US$44m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$19m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for iLearningEngines you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.