Is ALJ Regional Holdings (NASDAQ:ALJJ) Using Debt In A Risky Way?

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 ALJ Regional Holdings, Inc. (NASDAQ:ALJJ) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ALJ Regional Holdings

What Is ALJ Regional Holdings's Net Debt?

As you can see below, at the end of March 2022, ALJ Regional Holdings had US$106.2m of debt, up from US$92.9m a year ago. Click the image for more detail. However, it does have US$2.64m in cash offsetting this, leading to net debt of about US$103.6m.

How Healthy Is ALJ Regional Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ALJ Regional Holdings had liabilities of US$56.8m due within 12 months and liabilities of US$129.4m due beyond that. Offsetting these obligations, it had cash of US$2.64m as well as receivables valued at US$42.4m due within 12 months. So it has liabilities totalling US$141.3m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$89.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, ALJ Regional Holdings 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 ALJ Regional Holdings 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.

Over 12 months, ALJ Regional Holdings made a loss at the EBIT level, and saw its revenue drop to US$358m, which is a fall of 12%. We would much prefer see growth.

Caveat Emptor

While ALJ Regional Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$7.1m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$4.2m over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that ALJ Regional Holdings is showing 4 warning signs in our investment analysis , and 2 of those don't sit too well with us...

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.