Is Arteris (NASDAQ:AIP) Using Debt Sensibly?

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.' 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 Arteris, Inc. (NASDAQ:AIP) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Arteris

How Much Debt Does Arteris Carry?

You can click the graphic below for the historical numbers, but it shows that Arteris had US$1.84m of debt in September 2024, down from US$3.00m, one year before. However, its balance sheet shows it holds US$48.7m in cash, so it actually has US$46.8m net cash.

How Strong Is Arteris' Balance Sheet?

We can see from the most recent balance sheet that Arteris had liabilities of US$54.2m falling due within a year, and liabilities of US$41.3m due beyond that. On the other hand, it had cash of US$48.7m and US$8.90m worth of receivables due within a year. So its liabilities total US$37.9m more than the combination of its cash and short-term receivables.

Of course, Arteris has a market capitalization of US$426.3m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Arteris also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Arteris's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Arteris wasn't profitable at an EBIT level, but managed to grow its revenue by 4.5%, to US$55m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Arteris?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Arteris had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$1.8m and booked a US$36m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$46.8m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example, we've discovered 3 warning signs for Arteris that you should be aware of before investing here.

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.